Cute, But Perhaps They Could Become Productive

In today's blog by the famous Harvard Prof there is a You Tube pitch which is cute, very cute. You see I watched it because yesterday I had two dental implants inserted along with some rather difficult dental surgery and I am trying to keep off the hydrocodone, despite the pulsating throbs, I guess it is a Catholic response to past sins, pain is good, so to add to the discomfort I watched to whole video, yes the whole video.

Alas, the poor Harvard students are at a loss, but if they had studied Engineering and had done so say down the street, then there would have been a great surplus of let us say Problem Sets, real work, designing things which in and of themselves create value, compete with China, and even force a devaluing of the Yuan.

Instead the poor things are at a loss, a total loss, their curves chock a block up against the proverbial wall, or at least the vertical line.

All the result of some senseless remark from some unknown to me comedian on some cable channel which even in my most intense discomfort, and reminiscing my most egregious mistakes, even say in the midst of Lent, I could not even find. Pity. Penance is getting so difficult to perform in such a hedonistic land!

Perhaps I may try this after the next prostate biopsy ... the pain gets more focused then. Poor, poor Harvard students, adrift without a supply curve, or was it a demand curve. Go figure.

The Economy, October 2010, Updates

The PPI and CPI are shown above. They show signs of a continuing growth and as such reflect the change from the anticipated deflationary trend at the peak of the recession. However we also argue that the change is also a reflection of the change due to the readjustment of oil prices. We depict the annualized rates of change below:



















First the percent changes in PPI and CPI. Despite some concern they have leveled off at a nominally low rate but as noticed before PPI is still increasing at a higher rate than CPI. The CPI seems quite nominal due to control on energy costs of late.



















Food may see some future increases.Consumer credit and housing are depicted below: They have remained constant for the past few months with no significant change. The totality of metrics is shown below:




















Now as to the deficit:




















This depicts the current receipts and expenditures. Receipts have show a slight up tick but expenditures have become obscene. The current administration seems totally ignorant of this issue and any attempt to create a stimulus is merely an income transfer to union workers. The Romer piece commented upon yesterday is just another example of useless and foundationless rhetoric by those who frankly should know better but alas are clueless.

The actual deficit annualized on a quarterly basis is shown below:




















Studying this chart should send chills down the spines of all.

Health Care Costs: A Reality

The NY Times today crafted an editorial on the truth in health care. Their argument is simply that the Republican are distorting the truth and failing to state the realities.

The Times states:

Health care reform has already brought substantial benefits, mostly starting in late September. Insurers are now barred from dropping coverage after a beneficiary becomes sick. Dependents can stay on their parents’ policies until age 26. Insurers must cover preventive services and annual checkups without cost-sharing. Lifetime limits on how much insurance plans will pay for treatment are gone.

Let us simply disentangle this statement. They state which is true that the new law expands health care to include:

1. no dropping a benefit after an illness
2. dependents stay on till 26
3. preventive services and annual check ups cost nothing
4. lifetime limits gone

Now we are led to believe that these are costless editions to health care. Not true. They add substantial costs. Admittedly not dropping sick people is a moral as well as economic issue but it has a cost. Paying for children will cost since if they are still hanging around someone must bear the burden. The cost less checkups are quite costly indeed and often do not achieve the savings desired. The smoker still smokes and the obese person still has that bag of snickers. There is no incentive on the patient to remedy what is often a self controlled source of bad health. As for lifetime limits, that has a cost, but it is akin to an umbrella policy, perhaps we could have chosen that and paid out of pocket.

The Times continues:

The major benefits start in 2014, when tens of millions of the uninsured will gain coverage through Medicaid or by buying private coverage — with government help for low- and middle-income Americans — on the new competitive exchanges. If you lose your job, you will no longer lose access to insurance. And with government help the coverage should be affordable.

Far too few Democrats are explaining this on the campaign trail. The barrage of attack ads are hard to push back against. But the voters need to know that health care reform will give all Americans real security.

Indeed the initial costs may be small and yes indeed in 2014 the tsunami in costs will hit full force. Yet so too will the Government control of health care, the CCE mandates and the home mandates. Does the Time believe that we are that stupid to believe that when we more than double Medicaid that the cost will be zero! It will be massive and the demand may very well crush the system, burdened with millions of other changes at the same time.

It is not that the Democrats are not explaining it is that the Republicans have not fully expressed the disaster in the making.

Another Engineer

The FT reports that the next presumptive head of China was also educated as an engineer.

It states:

At 16 he was sent to work in a rural agricultural commune, along with millions of other urban youths, especially those who were considered to have suspect political backgrounds. Arriving in the north-western province of Shaanxi, an area where his father had once commanded a Communist party guerrilla army, he admitted to being intensely lonely. However he survived the experience, even using his burly frame to win wrestling matches with local farmers.

In time Mr Xi managed to win back favour within the party, and was allowed to study engineering at Beijing’s elite Tsinghua University. But unlike many of his fellow “princelings”, the children of the Communist party’s founding elite, Mr Xi turned his back on court life in the capital and requested his first posting in a rural area.

Tsinghua was where Norbert Wiener in the 1930s set up an outpost of MIT teaching random process theory applied to control and communications systems and where the basic principles of cybernetics were born.

China seems to have this continuing predilection to selecting engineers. Is there a correlation between economic performance and the education of the leaders? Perhaps lawyers and economists should take the back seat for a while. Just a thought for the day.

Who Would Take Advice from Her?

Romer, late of the White House, has a piece in the NY Times stating that we should disregard the Tea Party, and take her advice, after all she has been right ever since she got to Washington and then left, correct? No!

She states:

THE clamor to cut the budget deficit is deafening. Blue Dog Democrats, Tea Party Republicans and doomsday economists are calling for immediate action. And the demands for austerity coming from abroad are even louder.

She continues:

So, the question is not whether we need to reduce our deficit. Of course we do. The question is when...Now is not the time. Unemployment is still near 10 percent in the United States and in Europe. Tax cuts and spending increases stimulate demand and raise output and employment; tax increases and spending cuts have the opposite effect. This is a basic message of macroeconomics and a central feature of public- and private-sector forecasting models. Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession.

Now we must remember that she was the person predicting what the Stimulus would do and she was the person who chuckled each time she explained why her latest projections failed. What in God's name would incent any human to take her advice now! This is a person who never once said that despite the facts that she may have made an error. She now wants to just push on the pedal and drive the truck over the cliff.

She states:

Taking budget actions now that would further increase unemployment would be not only cruel, but also short-sighted. The longer unemployment remains high, the more likely it is to become permanent as workers’ skills deteriorate and they gradually drop out of the labor force.

The problem for the west coast magician with numbers is that the economy is stalled because of government. Money is being sucked out of the economy by the banks and the FED and the new tax plans not to mention health care and the like. Government does not create jobs, unless you think a government worker provides any value to the economy. Government takes capital which could best be put to use in the private sector. We now have one government employee per two real value creators and as we have shown it is getting worse by the month!

So what should one do. Given the fact the she has been wrong all the time over the past two years, perhaps we should do whatever she opposes. At least there is some logic to that plan.

Another Thought on Modern Buildings

Driving past this freshman dorm at MIT this week I again had a thought of what it would be to live there. The spot was a pickle factory when I was there a few decades ago and the blinking pickle would keep you company at height when you were working through problem sets.

But look at this facade, the windows are minuscule, the colors look like a kindergarten class and the facade is sending out a message of near despair.

Thus the argument that the recent trends in architecture have meaning in my humble opinion are empty. Bring back the pickle.

Malpractice and Evidence Based Medicine

In an Op Ed pieces in the NY Times yesterday, Orszag formerly of the White House, tries to make the point that under the new health care law, there should have been some modification of malpractice reform if physicians only did what the Government told them, namely practice the Government approved evidence based medicine, aka Comparative Clinical Effectiveness, and whatever nostrum it should be called.

He starts by saying:

The health care legislation that Congress enacted earlier this year, contrary to much of today’s overheated rhetoric, does many things right. But it does almost nothing to reform medical malpractice laws. Lawmakers missed an important opportunity to shield from malpractice liability any doctors who followed evidence-based guidelines in treating their patients.

We agree with none of the above. As we have shown the law is faulty in many dimensions and also as the research shows it is not at all clear that changes in tort malpractice will materially change the practice of medicine.

He proposes:

The traditional way to reform medical malpractice law has been to impose caps on liability — for example, by limiting punitive damages to something like $500,000. A far better strategy would be to provide safe harbor for doctors who follow evidence-based guidelines. Anyone who could demonstrate that he has followed the recommended course for treating a specific illness or condition could not be held liable.

The problem is that most physicians do treat patients in a standard manner since most patients have simple problems. When complex problems are presented and the physician treats the patient in a standard manner that is often when the problems arise.

Let me give some examples:

1. Prostate Cancer: As we have stated before many time, prostate cancer is a complex issue. 90% of the time it has a benign progression, and will not be the ultimate or proximate cause of mortality nor even morbidity. However, and this is the case, there are times when it can cause death quickly. We do not really know why at this stage. Thus if a patient presents with a low PSA but the velocity exceeds the standard level, the evidence based consensus says wait a while. Yet if we were to look at a first degree relative who died of an aggressive form of PCa then we should perform a biopsy. In that case we have a 25% chance of detecting a Gleason 7 or greater even though the PSA may be below 4. Then we should act. If however we follow the evidence, rather than the full Bayesian data set, we may see death of the patient in less than 4 years.

2. Type 2 Diabetes: The standard is to medicate and monitor. It becomes a steady cash flow to the physician and in general does not solve the problem in any manner. The only solution is diet and exercise. How do we get the patient to respond. The same would apply to smoking.

3. Breast Cancer: The most recent guidelines are not to do mammograms under 50 and over 75. Yet we now that many women over 75 get breast cancer and under 40 there is also a more than zero incidence. If we were to just follow the guidelines, the "evidence" then what? If we go beyond will we not be compensated?

He continues:

Better technology would help, too. Your doctor’s computer should be able to not only pull up your health records (after you have approved such access) but also quickly suggest best-practice methods of treatment. The doctor should then be able to click through to read the supporting research. Subsidies in the stimulus act help doctors pay for this kind of technology.

This is the EMR issue. Do we want the computer to be the watchdog for the physician. If the physician makes a different decision from the computer will they be liable. Remember the prostate case. The computer will suggest based upon some Government consensus what should be done to keep costs down. Do we really want physicians now to fear some GS 9 and their suggestions?

It appears that Orszag seems to say: If the Physician follows the Government mandated set of procedures then the Government will see that the Physician is protected from any form of litigation based upon sovereign immunity even if the patient dies as a result of an inappropriate therapy. This is akin to the statement of the Germans after WW II, "we were just following orders" Are we turning medicine into a set of pre-determined algorithms.

This is one of the most poorly thought out suggestions that I have ever seen. It is more Government, it assumes that physicians are robots, following some dictate, and that all humans are identical. Truth be told we are all different, we are all individuals, and that is why physicians have to deal with the person. On the other hand perhaps what he wants is physicians to become what we have created in public education, union members, educated to follow orders, get over paid, under worked, and generating poorly educated young people. I truly hope not.

FOX Has Dropped a Nuke

Public Knowledge reiterated the FOX blocking issue which I agree is wrong but I seemed not to have a problem with. Well, here we go, China in New York, the Mandarins at FOX have blocked my IP access! As of 16:00 on October 18th FOX seems back again blocking both. The Ayatollah of Sixth Avenue seems to feel free to do whatever they want. What next, block 911 calls!

There ought to be a law! It's like mom and dad having a fight, and I am there in the high chair and Mom decides to starve me even though dad gave her the means to feed me. A bit of a Family Guy allusion but alas FOX may have taken the step to get Net Neutrality initiated at last. And insured it is multilateral.

Good catch for PK.

And where is the FCC on all of this? Nowhere! Surprise!

Observations on Employment: October 2010

Employment as of September 30, 2010 shows no material growth. The rate of unemployment as reported is 9.6% and we estimate that using past data it should be almost 13%. The drivers of this unemployment we believe are threefold: (i) the general uncertainty in the economic factors resulting from the gross negligence in DC, (ii) the continuing increase in productivity due to the enhancements in technology, (iii) the continued outsourcing due to the high costs of comparable labor here i the US, driven by unions and the like. The above shows the current division of employment as of September 2010. Clearly we still have almost a third of the employment in the public sector, namely the Government, Education and Healthcare. That means we have two people paying for one person not producing wealth. The rate of growth of this burden is significant.



















The above shows the monthly changes by gross sector. Manufacturing still lags with growing declines. However the services has shown improvement for the past two months. One cannot outsource services too quickly and technology may have some impact but for the most part it has already been factored in. The Government blip was the census which perhaps the administration tried to use to bump the numbers up but to no avail.



















In calculating the true unemployment we look at the total population and at the percent of that population employed at January 2005 and then now. We try to keep the base as the percent of population in January 2005 and then from that we calculate unemployment rates. The source data is above.



















The chart above shows the Government unemployment and the unemployment using the 2005 base data. We see the rate is increasing again using the 2005 data due to the loss of the base seeking jobs. We argue that the true rate should be near 13%

Clearly we are no longer tracking the Romer Curve since Romer has gone back to California.

An Interesting Twist on Net Neutrality

As many know, I am a strong believer of Net Neutrality as defined as:

"Net Neutrality is the principle that any provider of connectivity shall not discriminate on any transport based on the source or content of the transport. Notwithstanding this principle, any provider shall be free to charge rates for varying forms of transport predicated on capacity or necessity independent of the source or content. No carrier shall discriminate in any manner based upon source or content."

Simple but alas I missed a point. Public Knowledge has pointed out that FOX is blocking customers from their web site if they originate from a Cablevision system. Specifically they state:

“Fox has said it is not allowing customers of Cablevision’s Internet access service to connect to Fox Web sites or to Fox content on Hulu.com.

Now I tried the Fox site and had no problem but this raises an interesting issue. Is there a corollary to my principle of Net Neutrality of equal merit.

No provider shall discriminate against any user based in any manner upon the provider that the user employs.

An interesting thought even if Fox is not blocking.

Fall In New Hampshire

Fall in New Hampshire. An old graveyard hidden in the small hills of the White Mountains with a smattering of well attended American Flags.

Where Do I Bring Up My Children?

In 2004 I had dinner with someone in the Netherlands. The question then was where does he bring up his children. The concern was the great influx of foreigners in the Netherlands and that perhaps the US was a better place. In 2010 I had lunch with a Chinese couple living in the US and the same question came up, except this time they were considering China.

China has its problems but China supports the entrepreneur and has managed its economy better. If you do not worry about the "freedoms" assured by the Constitution or fear that the current administration will wipe them out then China is a better alternative.

China Daily reports a 9% growth in China's GDP for the next year:

China's gross domestic product (GDP) will grow about 9 percent next year, but the economy will be challenged by rising labor costs, liquidity problems and difficulty in sustaining rapid growth in the long run, a senior researcher at the country's top think-tank said Saturday.

The very idea that given the current mess in the US economy and the current pressure to destroy the entrepreneurial markets by the current administration means that China looks better for the next generation. This may be a first.

MIT Buildings

The NY Times today had an interesting article praising the buildings at MIT in recent years. The above is the Stata Center, the Gehry disaster for which MIT sued the architect. I had an office there for a while and it was the most poorly designed building I have ever been in, and my old office was in its predecessor, the old Rad Lab building. Asbestos and all!

The Times recounts:

Next to it is perhaps the most-recognizable symbol of the new M.I.T., Mr. Gehry’s Stata Center, which opened in 2004. It brings together students and researchers immersed in artificial intelligence, linguistics, electrical engineering and computer science. (M.I.T. sued Mr. Gehry and the builder in 2007, after leaks and cracks required repairs. The lawsuit was settled in March.)

Frankly it does not bring anyone together, there are hidden connectors between computer science and EE, routes known only to those on the in. The windows look perpetually dirty due to the design and there are of course leaks and the entry ways seem to drop ice on ever individual seeking refuge!

The Koch building is workable but the Freshman dorm shown has tiny windows reminiscent of a prison and one wonders that if there were ever to be a fire that the student would have no exit via the tiny portals.

As to the old look, frankly the old buildings were are are examples of classic design. The dome stands the test of time better than any building I have seen. Stata and the Ghery kluge will hopefully soon be replaced.

Why Wilson?

The NY Times today asks why so many people think poorly of Woodrow Wilson. Well unlike many of those out there, I gather the TEA Party folks et al, I have a more personal reason for the dislike. You see in the above picture was my grandmother ( third from the right) just before she was jailed byWilson for protesting the War in 1916. He took upon himself the powers not given him under the Constitution to jail those with whom he differed including Eugene V. Debs, my Grandmother's close associate and fellow Socialist Party member. I recall conversations about the dinner table about Wilson and he tactics.

Wilson was also the only President who had a biography of him written by Freud, an interesting read.

You see Wilson was a Hegelian, for Hegel ran rampant through the initial halls of Johns Hopkins, and it was the Germanic view of destiny that sees to have driven Wilson. It was the Hegel of the telelogical end of history, the Hegel who would influence the Germans going into the Second World War.

He believed that the US form of Government should be replaced with a British Parliamentary form, at least until he took the White House, and like Beard and others saw the Constitution as a document of no relevance to the 20th century. In fact he saw the Founders as artifacts of the late Enlightenment.

His handling of the Peace Treaty discussions showed both arrogance and ignorance, a deadly combination. He had no understanding on how to negotiate, had no understanding of the European history which was replaying before him, and he was in many ways the typical American.

His stroke, long time in coming, left the country in his wife's hands.

And yes, he got out of Princeton just before he was to be kicked out, out of New Jersey in a similar fashion, and in the White House due mostly to the bumbling of TR.

So frankly what is there to like. Brandeis provided most of the good content, albeit in the shadows, and from the time Brandeis stepped away then Wilson bumbled on his own.

So was he a Progressive, was the New Freedoms a better way than TR's New Nationalism? Or was he an opportunist, albeit as Freud says with an explosively overgrown ego. He is an interesting study. In many ways he did not listen to others, he prized his own opinions above all others, and he viewed himself above error. His impact was significant in that it sent the Republicans into office.

The Time states:

Franklin Roosevelt has easily held the top spot on the conservatives' list of worst presidents, but Woodrow Wilson, who was in office from 1913 to 1921, has given him strong competition in the last couple of years.

FDR was a pragmatist. He tried almost anything and then if it failed he went to something else. Was FDR arrogant, somewhat, but he knew haw to work with people, how to choose the best and his handling of the War was in many was brilliant. He managed people in a way that exceeds almost any other human. Disagree with some of his actions, well almost all do. Often FDR had no idea what would result, but the old adage of "act, don't think" often works.

The true question is, Is Wilson a true Progressive? That is an interesting question. Or was he merely an opportunist. Did he assume the mantle of Progressivism to deter TR in 1912. Was Brandeis the true influence. But one should remember that Brandeis saw the banks and not the companies as the source of the problems. Brandeis was a true genius and he understood where the power and the problems resided. For Brandeis practiced law, he was not a career politician, rather he was a proficient attorney. Thus the Progressivism of Wilson was more the Progressivism of Brandeis, and then the issue is really, what was Wilson. Perhaps a true egomaniac, as Freud suspected.

More on Global Warming

There was an interesting article in the UK Telegraph regarding global warming.

This was the resignation from the American Physical Society of Harold Lewis who is Emeritus Professor of Physics, University of California, Santa Barbara and its former Chairman.

In his resignation letter from APS, Professor Lewis states:

How different it is now. The giants no longer walk the earth, and the money flood has become the raison d’être of much physics research, the vital sustenance of much more, and it provides the support for untold numbers of professional jobs. For reasons that will soon become clear my former pride at being an APS Fellow all these years has been turned into shame, and I am forced, with no pleasure at all, to offer you my resignation from the Society.

It is of course, the global warming scam, with the (literally) trillions of dollars driving it, that has corrupted so many scientists, and has carried APS before it like a rogue wave. It is the greatest and most successful pseudoscientific fraud I have seen in my long life as a physicist. Anyone who has the faintest doubt that this is so should force himself to read the ClimateGate documents, which lay it bare. (Montford’s book organizes the facts very well.) I don’t believe that any real physicist, nay scientist, can read that stuff without revulsion. I would almost make that revulsion a definition of the word scientist.

Why there is no recognition of this in the US Press is interesting.

Rare Earth Issue Continues

China is now saying that they will not block the export of the rare earth elements used extensively in modern electronics, per China Daily.

They state:

China has not, and will not block exports of rare earth, Premier Wen Jiabao told European political and business leaders in a keynote speech at the Sixth China-EU Business Summit on Wednesday."China is not using rare earth as a bargaining chip," Wen said. "We aim for the world's sustainable development."

It continues:

Wen called for proper controls and regulations for the precious minerals and metals that can be used for electronic devices, but said that China will not close the market. "It is necessary to exercise management and control over the rare earth industry, but there won't be any embargo," he said. "What we pursue is to satisfy not only domestic demand but also the global demand for rare earth. We should not only stand from the present, but should also look forward to the future," he added."If the rare earth minerals were used up, how would the world and China deal with the problem?"

Wen, a geology major in college, said he studied rare earth for years. In the 1980s and 1990s, rare earth metals from China were exported at low prices due to a lack of proper management and extraction technology, as well as chaos in supervision, Wen said. Some countries accumulated so much rare earth that they are still using those reserves today, he said.He also assured European investors that China would maintain a good investment environment for foreign businesses.

This issue has not ended, it was tested and it has legs.

Telecom Regulation and MIT

TPRC has been an evolving meeting place for the exchange of ideas for a few decades. In the early days it was a place for pre-divestiture discussions and peopled by Bell System types, and economists and a sprinkling of engineers. It also included from time to time people who actually worked in the trade as a professional, really doing something. That was my entry almost a quarter century ago. As the COO of NYNEX Mobile, and as one who had been in cable and satellite before, as a business unit head in all cases, I could try and bring some reality.

I even went as far as becoming vice chair of the TPRC Board.

In reading an MIT Press Release today I was a bit surprised by what it purported to say. Namely:

Google and Facebook became billion-dollar companies with virtually no control over the networks on which their services depend, and there’s no guarantee that their interests will converge with those of Verizon and Comcast. In this new environment, argues... a postdoc in the Computer Science and Artificial Intelligence Laboratory, regulatory bodies, too, need to adopt a new approach. The weekend of Oct. 1, at the Telecommunications Policy Research Conference in Arlington, Va., ... presented a thoroughgoing mathematical analysis of the effects of regulation on the telecommunications industry to an audience of regulators and other academics. The upshot of his analysis: In the Internet age, regulators need to concentrate more on building consensus among disparate economic actors; at the same time, they need to prevent companies from accumulating such dominant market positions that they stifle competition.

Regrettably the young author appears to miss two key points. The market often clears the problems and second the regulator oftentimes does more harm than good. The very suggestion, mathematics notwithstanding, that regulators can attain consensus amongst competitors is not only unrealistic but is counterproductive. The last fellow to do a thoroughgoing mathematical analysis was Kahn in the 1970s and the result was in my opinion a disaster.

The author allegedly continues:

The purpose of a regulator, ... says, is to balance societal objectives with economic vitality. In the case of telecommunications, the central social objectives are emergency communication, access for the disabled, and law enforcement. But today, meeting those objectives is much harder than it used to be. The old telephone infrastructure guaranteed access to emergency providers to anyone who dialed 911, but many of the computer applications that enable voice communication over the Internet don’t. Similarly, federal agents trying to track down terrorists used to just subpoena phone records; but if the terrorists are using different voice applications, text services, and Web servers, with data traveling over multiple networks managed by yet other companies, who does the subpoena go to?

The objective of any business is to make money by providing a service. The issue of universal service for example is the support of those who cannot afford telephone service from those who can. It is plain and simple redistribution. And how does it work? Well just look at the rural telcos, they collect money from the big city dwellers and redistribute it to the folks in the hinter lands. The current Administration has taken this farce to the ultimate extreme in redistributing almost $10 billion to rural residents so that the intended result is that any moose on the Canadian border will have 100 Gbps service! It is an abject waste of money. It takes money from an economic system which would distribute it in an effective economic manner and redistributes it to many who will just waste it. I suspect that many of the recipients will never achieve their intended goals!

Moreover the basic concept of creative destruction is inhibited by regulators. They retain the past rather than assist the future. Once something falls under the rubric of the FCC it slows to a halt. Had the Internet, and its predecessor, been under the FCC, and in turn under AT&T we would still have rotary dials! It is useful to re-read Coll's book, The Deal of the Century, which in many ways lays out this effective Darwinian process, the survival of the fittest, and AT&T was the dinosaur!

Frankly it is a shame that a student gets so much press when the reality of the world of telecommunications and the Internet requires a great deal of understanding; technical, economic, legal, and human.

The author's paper is presented at the TPRC Conference. After reading through the paper, in my opinion, it lacks any sense of reality. The author creates a straw man which he proceeds to demolish or otherwise use to bolster his ad hoc propiter hoc argument. Regrettably this is just another piece of work from the MIT group on Engineering Systems, the same group I have been critical of over the past few years. They seem to try to apply engineering methods to business situational yet do so in my view with limited understanding of the underlying realities of the business. One recent example was work done on the cost of broadband deployment with neglect of the costs of obtaining franchises which I had demonstrated was substantial. In contrast to the long legacy of MIT having its faculty and students in the midst of the evolving industry, such as exemplified by the practice group in Chemical Engineering and RLE in electrical engineering, this division frequently seems somewhat detached from day to day realities, in my opinion.

Perhaps I just have the distinct disadvantage of experience, perhaps the facts are just too distracting, perhaps having a mathematical model independent of reality is better than the real world!

Why the uproar, if this had been merely some post grad presenting a thesis it would likely have gone unnoticed. Yet MIT PR decided to acclaim this as the greatest contribution to policy formation of the century, or at least that is how I perceived it. That is what makes this so critical to review. One need look at the paper, and the thesis from which it is drawn, and see that in my opinion the author presents models from whole cloth, with no basis, and from the models draws conclusions. Not even the macro economists go that far, they are honest enough to call them models. Yet as I see and interpret it the conclusions appear to be promulgated as new truth. What basis is there for any of these new truths?

The Lunar Mission: A Commercial Approach

Al Fin has a fine commentary on the commercial prize driven approach to reaching the moon. This is a $30 million prize for the first to place a robot on the moon.

Al Fin states:

Successful private enterprises, permanently located in space and on lunar and Martian surfaces and beyond, are crucial first steps to the emergence of humanity from its planetary womb. It is no accident that internet and computer entrepreneurs such as Peter Thiel, Jeff Bezos, the Google team, and Paul Allen, along with billionaires Richard Branson and Robert Bigelow, are behind several projects to achieve private space enterprise.

Excess wealth always looks for future enterprises which may become the next big thing. It is this drive for new enterprise which is needed in order to expand the possibilities for humans on Earth and beyond. But that is exactly the kind of ambition and enterprise which the Obama regime has worked hard to shut down and prevent.

We are at a crossroads. One choice leads downward to perpetual totalitarian statism and near-ubiquitous poverty. The other choice leads to a limitless expansion and unlimited possibilities. You must choose.

This is well said. I remember my days at MIT Instrumentation Lab when we were doing the moon landing work in the mid to late 60s, there were massive numbers of people, some working quite hard and others, great masses of others, pushing paper. The overhead in any Government controlled project is incredible, just look at DoD.

Yet the entrepreneur, motivated by what is a tip in NASA terms, has more potential than any large organization. This will be an interesting project to follow.

Baseline Portfolio: October 2010

We have been tracking the Baseline Portfolio since December 2008. In a sense it is a measure of the Market's view of the current Administration.

Here is the latest.



















The gain on the original $25,000 portfolio is now $16,000 plus a 5.5% annual dividend yield. This comes out to a 22% annual yield. Note that we saw the initial dip and then the return with the annualized return remaining at the high 20% level.



















We depict the same above showing growing gain and a stable rate of return on this core portfolio.

The following is a daily rate of return plot.



















The Market seems quite strong and perhaps we will not have a classic October surprise. Yet there is the question of where is the demand coming from? The elements of the portfolio are shown below with their total gain over the period. All but Verizon have done well.

Verizon Communications Inc.	5.53%
International Business Machines Corp.	77.40%
The Dow Chemical Company	57.03%
Johnson & Johnson	12.69%
Kraft Foods Inc.	22.17%
E.I. du Pont de Nemours & Company	103.15%
Alcoa Inc.	28.33%

Remember the CLECs?

There is a continuing cry from those who have little or no knowledge about which they speak regarding broadband. The latest is a cry from of all places Scientific American.

You see, in early 1960 I bought my first Scientific American, and I read every page and every article absorbing the science avidly for each page brought to light new ideas as a high school junior I was anxious to learn. And here in Scientific American, written by those who actually did the work, were at least a half a dozen great things every month. I still have all the old issues, real treasures. Then something happened in my opinion and in my opinion Scientific American became a clone of Red Herring, Technology Review, and the swath of techy promotion rags which cover the roadside of soon to be defunct magazines. It is a sort of self inflicted death wound in my opinion that some how gets inflicted by some group of outsiders who manage to convince the owners that the magazine must spruce up its image.

Now Scientific American is proposing shared broadband sold at wholesale. Specifically Scientific American states:

Phone companies have to compete for your business. Even though there may be just one telephone jack in your home, you can purchase service from any one of a number of different long-distance providers. Not so for broadband Internet. Here consumers generally have just two choices: the cable company, which sends data through the same lines used to deliver television signals, and the phone company, which uses older telephone lines and hence can only offer slower service.

The same is not true in Japan, Britain and the rest of the rich world. In such countries, the company that owns the physical infrastructure must sell access to independent providers on a wholesale market. Want high-speed Internet? You can choose from multiple companies, each of which has to compete on price and service. The only exceptions to this policy in the whole of the 32-nation Organization for Economic Co-operation and Development are the U.S., Mexico and the Slovak Republic, although the Slovaks have recently begun to open up their lines.

Well truth be told, we most likely have as good if not better than most if not all countries. you see I built that network in The Slovak Republic, in the Czech Republic, in Poland, in Romania, in well you get the point. I know what happens there, still have many friends there as well.

The folks at Scientific American somehow forget or never knew of the 1996 Act which created the CLEC, and unbundled local loop. Well that lasted just so long, you must own the assets to make them work, just look at the cable companies, the only viable competitor to the Telcos.

In addition, less and less people have land lines any how! You see in 2002 I wrote all this up in a paper entitles the Imminent Collapse of Telecommunications. I think the projections were a month off here and there, but generally on target.

So what do the folks there at the once great Scientific American want? They want Verizon to build fiber and then lease it at wholesale, yet what is wholesale? We played this game before and we lost $5 Trillion in the Telcom collapse, yes more than the banking disaster, but there we just let people loose money not tax the public, Oh well socialism works all so differently!

Recession Statistics: October 2010

We look again at the Recession Stats from the St. Louis FED and provide some commentary.

1. GDP and Its Components



















First, the GDP is showing slow and somewhat troubling recovery. This is the gross measure of recovery Note that although not at the bottom of previous recessions it is near the bottom.



















The GDP first component is Consumption and it is at the bottom. People are not buying and in turn the economy is not growing. We have shown just recently the increase in savings but also the unemployment is acting as a significant drag as well. We do not anticipate any change here at all.



















Investment in property, plant and equipment has increased and this may be a sign of improvement. Yet we also suspect that there is a fundamental change in the economy occurring. Productivity has increased, manufacturing is more automated, and labor intensive elements have been outsourced. This applies across the bard throughout the full chain of manufacturing including professional jobs like engineers.



















Strangely Government consumption is on par. This is despite the massive flow of money into the system via the Stimulus package which clearly has been a total failure by any metric.



















Export growth has been positive. Yet as shown below imports are a drag, and this is due to the lack of consumer demand.



















2. Detailed Metrics

Let us first look at employment. This we show below. This I believe details the inherent structural change occurring. The demand for labor is down, increased productivity, reduced global demand, increased automation and the ability to globally out-source is making this change. Also is the loss of true long term technical talent to China and ultimately India will drive the strength of the US into the gutter! Perhaps the Government should be more attuned to keeping Chinese and Indian PhDs in science and engineering rather than motivating farm laborers to get GEDs. This is truly the strategic issue.



















The income numbers reflect this change as well.



















With a failure to grow employment we have a failure to grow income and thus demand lags at record low levels, reflected in the consumption component of the GDP.

Strangely industrial production is up, and combined with exports that explains the recovery in part. We show that below:



















Finally retail sales has somewhat rebounded meaning that those with jobs are buying but at a modest rate.



















Thus the recession is slowly ebbing but it is leaving behind many structural problems which the Administration has not addressed. The science and technology education issue is critical. Schools have created academic economic bubble with more deans and associate deans than ever before. I wrote a year or so ago about the Elizabeth Warren suggestion that we just allow the rampant inflation of tuition but solve the problem by having the Government pay for it and then take from the economy the students whose tuition is paid for and have them work for the Government in some make work program. Clearly Warren has no understanding of economics and business. I guess the White House is a good haven.

You see we need good technical talent and we need them at a young age and with the ability and desire to take risks, not be burdened with tuition and loan fees, and especially not with spending useless and costly time on some Government Great Leap Forward program. Warren seems to have no understanding of what creates value, it is the risk taking entrepreneur and especially the one in high tech.

The IPCC and its Monopoly Power

In an interesting article in VOX the author, a Dutch academic, makes the point that the IPCC, that now infamous organ of the UN analyzing global long term climate change, is first a monopoly and second as such has no control over its efforts and quality.

The author states:

Let us consider one such monopolist, the Intergovernmental Panel on Climate Change (IPCC). I argue that it has a natural monopoly and that it therefore should be regulated rather than broken up. This carries over to other, similar organisations.

The IPCC is a joint venture of the World Meteorological Organization and the UN Environment Programme (Oppenheimer et al. 2007). It is mandated to periodically assess the academic literature on climate change, its impacts, and policy interventions. The IPCC is the sole advisor to the international negotiations on climate policy under the UN Framework Convention on Climate Change, and certain technical features of climate treaties are taken directly from IPCC reports. Many smaller countries do not have the capacity to assess climate change and policy, so they exclusively rely on the IPCC as well. In all but the largest countries, the IPCC is a very important voice. The IPCC also bestows legitimacy (in climate research) on academics and their work. The IPCC has a monopoly in some markets and a dominant position in others.

The IPCC has a natural monopoly. Its main assets are its reputation, access to policymakers, and access to academics. A new entrant would have great difficulty building up the same position. Maintaining the IPCC already puts a strain on the academic and policy communities. Duplicating the effort would be costly, and as the new entrant would assess the same literature and presumably reach very similar conclusions, the benefits would be minor.

Natural monopolies should be regulated, particularly if they abuse their position...

Indeed that is one of the major problems with the IPCC. Science is inherently a process of knowledge generation by conflict. One side observes the data and presents a model, a theory if you like then the other side using the same or perhaps new or different observations, reinterprets them and presents a differing theory. This is the constant tale of Science. Kuhn had come up with one model and Popper with a slightly differing one, but no matter which view one takes the essence of true and valid science is the conflict of views and their resolution. It is in many ways Hegelian.

The IPCC as the chosen monopoly come up with one view, it is then the only view, it is akin to the Vatican and the infallible Pope, an idea which was not formally accepted until the late 19th century. Perhaps infallibility works in religion but in science it never does.

Understanding Coase

Coase had brilliant insight into economics and the market. Simply if there existed enforceable property rights in everything, and the transaction costs were de minimis, then the market could clear any inefficiencies in distribution.

A recent example was discussed by Marron which I believe is close but not quite there, namely I believe it is not Coasian. The case is water rights, the upstream users and the downstream.

Take the Hudson River. Those up stream, say in Albany, dump junk in the river and those down stream, say the west Bronx, end up with trash. Thus Marron articulates two solutions:

First, the Government intervenes and establishes all sorts of rules, all with unintended consequences.

Second, and this is where I believe he is off, those in the Bronx pay those in Albany not to do what they have been doing. To anyone who knows New York that is what is happening already. The Legislators are dumping trash in the River and then they also tax those down stream, but the trash never stops!

The Coasian solution I believe is the following. The water use is a defined property right. The Government's sole role is to enforce the right. The down river people notice the junk and they sue those up river who pollute. The Government enforces the property right and the up river folk pay compensation to down river folk. They also clean up the river.

Coase did not think bribes were the solution. Property rights were and the Government's role in enforcing them.

China and Its Moon Landing

I remember in the mid sixties when I worked at the MIT Instrumentation Lab on the US moon landing program, the only competition we thought we had was from Russia, and China was not on anyone's list. Today China has reported on it moon landing effort with significant progress.

In China Daily they state:

China moved closer to its goal of landing on the moon as its second lunar probe, Chang'e-2, blasted off seconds before 7:00 pm on Friday from the southwestern city of Xichang. A Long March 3-C launch vehicle, with Chang'e-2 on top, lifted off from the Xichang Satellite Launch Center in Sichuan province at 6:59:57 pm as planned.

The circumlunar satellite separated from the rocket at 7:26 pm to enter the Earth-moon transfer orbit. In less than five days, it will enter a 100-kilometer lunar orbit. About an hour after the launch, Li Shangfu, director of the Xichang launch center, declared the launch a success to cheers and applause in the command and control hall.

The Chang'e-2 mission is considered "a starting point" of the second stage of China's lunar exploration program that focuses on landing on the moon, a spokesperson for the lunar exploration program, said. The probe plans to test technology in preparation for an unmanned moon landing in 2013. Developed with indigenous technology, the 900-million-yuan ($134 million) Chang'e-2 mission will test key components for a soft-landing on the moon. Friday's mission marked the first time that a Chinese lunar probe directly entered the Earth-moon transfer orbit without orbiting the earth first.

This means that China has decided to make certain that it peer to peer with the US. Although spending money on space is generally a wast of time and effort after a certain point, China has quite a way to go. This is a major step forward and one would not be surprised if they get to Mars first! The current state of NASA is worse than the CIA, filled with many who often could not get jobs elsewhere. This should be left to private industry and the Military. After all did not the current Administrator state that his current mission as per the current Chief executive is to build up the morale of the Arabs! I suspect China has other motives.

Economic Signs: Entering Q4 2010

Let us start with the savings rate. It is averaging at 6% with a small drop up from 1% in July 2005. Savings is generally a positive factor here with an appropriate comment regarding it from Rowe.


















Now total savings is shown below and we are running at $700 B as compared to $100 B five years ago, and this provides both an added buffer in the economy plus the added capital for banks given the increased reserve requirements. Imagine what would have happened with increased reserve requirements with lowered savings. However the increase in savings in face of the de minimus return bodes well for low inflation expectations at least for now.






































The income is shown above. There is a concern that it is not growing and this is mostly reflective of the unemployment situation and yet that will drive down tax receipts and drive up unemployment, which however is allegedly an insurance payment and not an added tax burden, yet we all know politicians.

The main problem is Federal Consumption which continues to grow at 7% annual rate unabated as shown below:



















It has grown almost 50% in five years! This is a major problem which the current Administration is most at fault over.

The CPI however is growing at a very low rate as we show below. Yet this is due to oil price stabilization due to the drop in global demand as a result of the world economic problems. Our concern is that could change on a dime.



















Finally the ISM, manufacturing data shows some signs of concern which need watching. Shown below is the ISM Total and New Orders. We see the Total on the upswing and new orders on the down swing. The downswing is a trend and that is a concern.



















Q4 should be a telling Quarter regarding how we look at 2011.