Measuring National Cost of Pollution

In a fantastic article, titled “Environmental Accounting for Pollution in the United States Economy“, Professors Muller, Mendelsohn, and Nordhaus for the first time build a framework whereby individual industry/company polluting contributions to the National Account (GDP) can be measured. As they note, historically, the approach in measuring the cost of pollution has been to rely “… on material flows analysis to calculate the tons of
emissions per unit of production by industry” As they note, while “[]the materials-flow approach is useful
for tracking physical flows, but it is inappropriate for national economic accounts because it does not contain values and because the damages associated with different source locations and toxicity are not included.”

So Muller-Mendelsohn-Nordhaus (MMN) method allows for integrating the environmental impact of different industries into the national account. The implications are huge. If environmental conscience states/counties suffer from lack of tax revenues that would have been generated if the polluting companies where allowed to operate, now with this method a system can be envisioned through which the polluter states/counties can pay for the sins! Of course on a global scale, such a method can also give rise to a system whereby industrially rich countries can measure what the fair value of the compensation for poor environmentally rich could look like. Brazilians and Congolese may find it more valuable to sell the oxygen their rain forests generate than their minerals! (After all without their iron ore we might be catapulted back to the stone age but without their oxygen we be DEAD! if you don’t believe me, check out the new series Terra Nova on Fox)

 

Postal Service Cuts to Slow First-Class Mail – NYTimes.com

Postal Service Cuts to Slow First-Class Mail – NYTimes.com.

In my Sep 20th post, I blogged about the overreaction of the market about the Netflix’s strategy of separating DVD delivery service from streaming service and putting them into two separate web services. I have to be the first to admit that I was too naive and too forgiving for not recognizing the consumer backlash. (and I have paid dearly for it since my options are not worthless!)

Having said that, I am also quit proud to have foreseen the devastating effect that a USPS collapse could have on Netflix and as is indicated in the above article, processing center closures would increase delivery time for Netflix and hence their push to make the streaming a bigger part of their business model. Given that now the debunked Blockbuster is owned by cash-rich hedge funds and this gives them a edge in competing with Netflix on DVD delivery, if high-speed intrernet becomes the thing of the future (particularly if Google has anything to say about it Google Will Build High-Speed Network in Kansas City, Kan. – NYTimes.com.), then Netflix should be rightfully applauded for foreseeing the tectonic shifts in their competitive landscape and have taken steps to avoid the disastrous implications of a USPS demise. I cannot say when, but I am going to build up my positions again as soon as I am convince a finicky market is finally catching up with the reality!

 

The Politics of Economics

The Politics of EconomicsThe Politics of Economics – NYTimes.com.

Fantastic article on how snake-oil, con-men who portray themselves as “the authority” for everything under the sun without having even once looked at the actual data have manage to contort the public perception of the reality. I have said this a number of times in my classes, that despite the rhetoric in popular media, academicians in finance and economists–albeit imperfect and at time self-adulating–have warned us of just about every major bubble in last 20 years. (most famously is Professor Robert Shiller with his warnings of stock market irrational exuberance of 1990s and the real estate bubble of 2000s)

Even in the aftermath of 2008 global financial crisis, there have been great ideas that yet to be discovered. This includes MIT’s Professor Andrew Lo’s idea of an NTSB type organization for the financial system that in the aftermath of every major failure steps in and analyzes the evidence and publishes its findings so that the industry, the government and the public can make better decisions (see Andrew Lo’s congressional testimony).

 

Are We Getting Nicer? – NYTimes.com

Are We Getting Nicer? – NYTimes.com.

 

Decision Making under Uncertainty For Success: Lessons from Jim Collins on Charlie Rose Show

I was listening to Charlie Rose’s interview with Jim Collins about his new book, “Great by Choice: Uncertainty, Chaos, and Luck–Why Some Thrive Despite Them All” (and his older work, “Good to Great: Why Some Companies Make the Leap… and Others Don’t“), about success stories.In his new book, he asks how small competing, aspiring companies starting out in challenging environment—Southwest Airlines and Pacific Southwest Airlines—end up with drastically different results.

He was saying that in his book, which I have not read, he uses march to south poles of Amundsen and Scott as a parody to explain how two different teams/companies approach for success under challenging circumstances differs so tremendously and why they are different. Amundsen, the Norwegian explorer beat Captain Scott to the South Pole and return back home safely. Scott and his company reached the pole but they perished on their return way back.

Collins was saying that difference was that Amundsen had three things going for him that Scott didn’t have: 1. Discipline, 2. Productive Paranoia,and, 3. Empirical Approach to What Works. Amundsen had decided that every day, no matter good or bad weather, they only make a 17 mile approach. Scott would kinda roll with it, good days he would go more to make up for bad days. The problem with this approach was after a good day, they were exhausted and fatigued and weak and so could not really handle a bad day. Amundsen would give himself a lot of margin for error. He would put marker almost 5 miles apart to make sure they would never get lost on the way back! He brought dogs because dogs eat dogs, so on the way back the healthier dogs could feed on the dying ones! Lastly, Amundsen had the foresight to live a year with Eskimos to learn about how to survive in the environment and unlike Scott didn’t exclusively rely on modern tools and machinery.

Collins then went on to say that great companies, like Southwest and Pacific Southwest, which started their ascend in a rough times, also differ from one another in major ways. For instance, the success stories hold a lot more cash, a productive paranoia of not being able to survive the Armageddon! In essence, they have an understanding that successive bad luck can wipe you out! Collins make the point that good luck cannot make a difference on your success but bad luck can! Bad luck in a row eventually would kill you off! That why you would need ten times cash to assets to survive the bad luck years!

This was fascinating because it has been a fixture on my lectures in investments and even corporate finance. I always make the parody with gamblers. Decision making under uncertainty is very much a gamble and in fact every business manager is a gambler. All great gamblers actually share the same traits: they are unbelievably disciplined, they understand gamblers’ ruin problem (i.e., you need capital to survive bad hands), and they are flexible in the face of adversity and they constantly learn and reexamine their methods. Good managers thus need to have a discipline, that is stick with well-thought-of plan! But they also need to be more-than-prepared for nightmares! And, lastly, they are humble enough to know that they don’t have all the answers and they need to learn constantly.

Of course, Collins went out to also say that the above is not necessarily against risk-taking. He said that great managers clearly take risk but they almost perfectly understand the risk they are approaching. More importantly, they embraced sudden changes and think how to scale the change up in their own favor. This, of course, was something that I do believe but I have not spent a lot of time exploring. I do know, and particularly, in the last couple months with all the volatility in the market, that while my stocks picks have been great, I needed to be more reactive and harvest my profits faster. If not, they would vanish in a manner of days. I am a fan of Charlie Rose and this interview of him with Jim Collins certainly ranks in one of the his best.

 

The 5-5-5 Plan

So Herman Cain’s 9-9-9 plan is all the rage nowadays. Well, I have a different catchy-name plan: the 5-5-5 plan! And it has nothing to do with taxes but rather with social engineering, specifically bringing up birth rates in advanced economies where birth rates have been below replacement rate for decades. I propose that advanced economies should offer $500,000 in tax-exempt retirement funds to the parent of every child that goes to college (or trade schools and learns a trade). For every college graduate, the parent receives another $500,000 of tax-exempt retirement funds. And lastly, if both parents are still married by the time their kid graduates from college, they received another $500,000! Hence the 5-5-5 plan! (I also propose that the same deal can be repeated only for a second child).

Most population growth promoting scheme like the ones Canadian once instilled almost hundred years ago and the ones Japanese are thinking about today, only pays if babies are born. But it does nothing towards actually producing productive members of society and more importantly promoting coherent family units who give close attention to the care for their children. Given the fact that college grads earn better than high school drop-outs and the fact that 21st century belongs to even more highly educated, my plan essentially guarantees that parents have incentives to see their offspring become effective members in their own century.

I do admit that there are wrinkles in the plan. For instance, early child/birth care (prenatal and postnatal) is crucial and expensive. Given that many couples now marry late, to the child care, we need to even add fertility-assistance related expenses. So the money needs to be deposited gradually and perhaps with some cash up-front so that there are actually incentives to even “make” babies! Also, since life-spans are increasing and there’s dire need for continuing education, perhaps these retirement funds can be used after kids graduate from college for things like paying for parents going to college or starting a business. I leave the details to the lawmakers who are good at taking great ideas and making a mess out of them!

The 5-5-5 is not just a baby-making machine. It is designed to address one fundamental dilemma: why should people procreate? Aside from religious reasons and selfish motives (of course accidents), child bearing has become less of desired social activity in advanced economies for economic reasons. As Fred Pearce argues in his book, “The Coming Population Crash: and Our Planet’s Surprising Future“, one of major reasons for below replacement rate of birth rates in advanced economies is the economic possibilities that women face which makes pursuing dreams other than motherhood much easier. This brings about a multitude of problems. Educated, successful, powerful women choose careers first and even when they desire to start a family is later in their life. So any scheme that is targeted towards enticing them to procreate needs to be as powerful as the economic motives they have otherwise. Sonia Arrison in her book “100 Plus: How the Coming Age of Longevity Will Change Everything, From Careers and Relationships to Family and Faith” additionally argues that our ability to live very long, healthy lives produces great challenges to the notions of life planning, retirement, education and even careers. In my last post, I also argued that in addition to longer life-spans, the shorter technological half lives (e.g., not even 20 years after PC-era, now in the words of Steve Jobs, we’re in the post-PC era!), we are faced with a life that is too long and careers that too short. We will be forced to re-educate ourselves multiple times and change careers multiple times and work till very old age. In the old economic schools, the life-cycle planning would require mid-life careers to pay for early education and later retirement. But if we have to do education in multiphase and retirement per se may never come, then the reward to activities that helps the society most needs to pay more often and faster. In the ancient times, farmers made a lot of babies to overcome high birth death rates and to produce cheap labor. Of course later in life, these kids would become seocial security! But in the industrial age, workers produce babies mostly out of expectation for larger families and perhaps unknowingly for generating future tax payers who would pay for their social security retirement! With social security systems being bankrupt because of the demographics changes, it’s time to rethink our whole attitude towards life planning: child-rearing, child-care, education, career planning and retirement, The 5-5-5 plan is an answer to this age old problem.

And now the last bit of the surprise: who will pay for all of this? I am ardent believer that taxation is not just a revenue generation scheme but a mechanism for income smoothing and saving over very long run. More importantly, the progressive tax systems are necessary to allow for automatic dampening of economic fluctuations. Since the rich (individual or corporate) do benefit more from a highly educated workforce, they will pay a share of the scheme (and if they don’t like it, they can setup shop in all the other countries that don’t give hoot about education and advancement of technology!) Of course, if the plan works, then we would have a balance population which pays for itself, that is these new babies can pay the taxes that rewards their parents’ sacrifices! Now I call that the ultimate zero-sum game!

 

Longer life-span and life-cycle planning

I just re-posted an article from NYTimes which reports of a new advancement in aging. The article basically speaks of new methods to purge body from aging agents, the so-called senescent cells—are bad actors that promote the aging of the tissues—and thus prolonging life. This is actually quite interesting because I had a the pleasure of listening to a Bloomberg interview with Sonia Arrison the author of “100 Plus: How the Coming Age of Longevity Will Change Everything, From Careers and Relationships to Family and Faith“. Ms. Arrison makes the case that a life-span of 100-year plus is at reach and this means how we see ourselves and plan our lives would change forever. Sonia argues that not only the life-span is increasing but more importantly the quality of life is improving at a rapid pace making being older actually quite a hoot! But this comes at a price. The old ideas that you go to school, learn a trade, find a career and then work your tail off till your sunset years, should change and will change! I actually have been arguing for the same change for different reasons. I believe that since industry life cycles have been shrinking down tremendously as the results of our technological advancements, it is almost impossible to believe that one can stay around one industry all his/her life.

Taking Sonia’s point into account, I think now I have to come to the conclusion that we live longer and our own creations (i.e, ideas, industries, opportunities, etc.) die faster, hence in our life time, we will be forced to re-train ourselves multiple times and more importantly life-long learning and continuing education is no longer a buzz-word but a necessity for survival. Call it “revenge of the nerds” or whatever you wish, but the “Sheldon Coopers” among us (yes, I am referring to the beloved genius in the “The Big Bang Theory“) have made the speed of change so fast that industries, jobs, and fortunes now come and go in a manner years and not decades. And this perhaps would get even worse. This means greater part of our lives now need to be spend on understanding the head-winds and coming technological innovations to figure out where we want to position ourselves in upcoming decades. Scary stuff but then again for as long as humanity has been around immortality has been a dire wish. But as the saying goes, “beware of what you wish for!”. And now that the long-life is at hand, I guess we’ve got to get ready embracing it!

More importantly, when it comes to retirement planning part of life-cycle planning, the old notions need revisions because perhaps there won’t be a thing called “retirement years”. Advanced economies and even up-and-coming emerging ones like China are struggling with the larger burden of social security debt and whether you like it or not, the eventual solution—short of abolishing them—is to reduce benefits, extend eligibility threshold and thus make people work longer years. This of course changes how we see our own role as individuals pursuing our own dreams, as parents helping shape the future of the next generations, and as children who will give care to their own elderly. The interesting thing is with extended life, perhaps some of old questions of fertility rates and population booms and busts can also become quite complicated. I will address these issues in the next post. Cheers!

 

Senescent Cells Are Linked to Diseases of Aging, Study Finds – NYTimes.com

Senescent Cells Are Linked to Diseases of Aging, Study Finds – NYTimes.com.

 

Real Estate Prices, Economic Activity, and Employment

Three years ago, in a blog on Sep 21 2008, I suggested that a way out of the economic abyss was to allow individuals write-off their property value losses as tax deductions. The reaction I always got was “… well who’s gonna pay for all those taxes?” Three years after, the national debt stands at more than 18 trillion and this is far more than what it would have cost in lost taxes to pay for a version of marking-to-market the mortgages (see CBS MoneyWatch report on the magnitude of the losses.) Of course, since my original plan called for gradual tax deductions over a period of time, then time value of the tax losses would have been even that much smaller.

Last week, at the annual financial management association meetings in Denver (which is one the largest gatherings of financial economist), I was lucky to sat in on a talk by Ralf R. Meisenzahl, incidentally at the Federal Reserve, who presented an intriguing paper on what is the cause of constrained lending in the US (and by extension the high unemployment). The upshot of his paper was goes like this: bank lending has two fundamental risk, the borrower risk and the balance sheet risk. The borrower risk means that less creditworthy borrowers expose bank to severe default risk and thus the bank need to curb lending and so they hoard cash. Balance sheet risk means that banks cannot access funding easily because investor fear moral hazard associated with bank deposits and thus they hoard cash to beef up their capital and signal their willingness to avert moral hazard. (Moral hazard here refers to the fact that banker can go nuts with depositors money!) Meisenzahl paper put both theories to a horse race and finds that borrowers risk (or in the academic lingo the state verification risk) wins the race: banks do not lend to small businesses because small business’ collateral mainly real properties own by the business or the owners have depreciated severely in value.

Now, so why is this so important? As the president Obama attempted to address in his new Mortgage Relief Plan the housing bubble has been “the single greatest cause of the financial crisis and this brutal recession,” and thus the effect of the bubble bursting must be remedies. Well, I hate to be the one to gloat, but, I TOLD YOU SO! Three years ago to be exact and still these prancing around is not going to resolve the problem. While mortgage rates have come down significantly and the inability to refinance underwater mortgages is a source of less than stellar consumption, the more pressing issue is that no one in their right mind is going to go on a buying binge when their house prices is half of their mortgages! Banks HAVE to either voluntarily or forcefully take the losses and bring the aggregate household debt to its market value. Anything short of what Europeans made their banks do with Greek loan is not going to work! A refinance from 6% to 3% on an existing $500,000 loan would reduce current annual payments of almost $37,000 to about $26,000. But if mortgages are written-down by half, even at 6%, the annual payments are about $19,000! Now that’s a saving you can bet would make people go crazy! I said this before and I am sure no one listened, but I say it again: all mortgages need to written down to their fair value, if you want to save the economy! And this time around, even the Fed researchers agree!

 

Startups: What I have learned this last summer!

For those of you who already don’t know, I spend a weekend in Boston with StartupWeekend and it was a hoot and half! I probably was one of the older people there and the only academic and one of the few in financial industry. I have to admit I never put much stock in new age lingo of the startups, but after spending a weekend with an energetic, unbelievably driven crowd, I was put to shame! I was lucky to have my idea go all the way to the presentation stages, which means we had to build a prototype page and try to convince the investors that we’re worth a shot. We didn’t win anything and the team kind of got scattered each doing their won thing, but I have learned a lot from the experience. I have been meaning to summarize my take on the experience but I think this recent blog summarizes the essence of what I wanted to say.

It is noteworthy that successful startups do start slowly. That is the ideas need to be tested carefully and the number of people who are involved are very few. This means a lot of sweat equity goes into this stage. The successful startups spend way less on customer acquisition in early stages. This means that in the early stages, word-of-mouth, and by extension, perceived-quality-delivered are quite pertinent in generating awareness and thus you don’t need to con people to come over your side (through expensive advertising)! It also means that you need to spend a lot of time, and not money, to get your name out there. Successful startups outsource much less in the early stage of their development: if you can’t do it yourself, you probably won’t be able to do it at all! And last but not least, if you can make the 100,000 user mark without too much lines of codes written and without a lot o money spend, then you’re probably on the right track! [You can find more about the study that generated this result at Startup Genome page].