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Nobody Could Have Predicted

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News from Techcrunch today regarding more backing for a regulated bitcoin exchange in the US:

Fresh from scoring a massive $75 million funding round, bitcoin payment firm Coinbase has revealed that it will open the first regulated bitcoin exchange in the U.S. on Monday.

The company, which added the New York Stock Exchange and USAA to its list of investors last week, told the Wall Street Journal that it has “regulatory approval” in half of all states, including significant areas like New York and California. (The New York Department of Financial Services has been very vocal in its call for regulation via a proposed ‘BitLicense’.)

Coinbase already offers exchange services in 19 countries overseas, and it said that its work accruing necessary licenses and approvals in the U.S. took five months. The company will only be able to offer services to customers that sign up in states were it is approved, but there are plans to gain approval in further states.

It's hard to reconcile the increasing infrastructure surrounding bitcoin with the reality that it is fundamentally and irretreivably flawed and destined for eventual collapse that nobody could have predicted.  Because if recent years have taught us anything, it's that the backing of major financial institutions is a reliable sign that a bubble situation is impossible. 

My Huffington Post Essay On Financial Reform & The Green Economy…

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…is live. Wander on over for a (hopefully) interesting read titled "Nicholas Baily: Financial Reform? Sure. Kill America's Future Green Economy? No thanks." 

Here's a preview:

In the State Of The Union address, President Obama outlined a plan for economic growth, with green jobs as a cornerstone. Saying "the nation that leads the clean energy economy will be the nation that leads the global economy" the president directly mentioned jobs in clean energy and technology no less than six times. And his vision was clear.

In his own words: "We should start where most new jobs do — in small businesses, companies that begin when an entrepreneur takes a chance on a dream, or a worker decides it's time she became her own boss. Through sheer grit and determination, these companies have weathered the recession and they're ready to grow."

The rest at The Huffington Post

An idea whose time has come

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Did you know that the top 7% of the world's affluent create over half of the world's carbon emissions? If that's of interest to you, this article on Luxist about The Belgrave Trust should be of interest:

The Belgrave Trust has a unique proposal, make living carbon neutral easier and more appealing to the luxury consumer. The Belgrave Trust website helps members learn how to offset their entire lifestyle and easily purchase offsets. Many websites can help you offset the cost of a flight or road trip but the Belgrave Trust appeals to the lifestyle of the high-end consumer, showing offsets for things like private jet travel and wine collecting, allowing members to create a specific profile tailored to their lifestyle. For example, the site can help calculate offsets for recreational flying or yachting and can be set up to manage your total carbon usage. The world's most affluent people are responsible for a greater share of the world's carbon emissions. The Belgrave Trust challenges its members to assume a leadership role in reducing greenhouse gas emissions.

Well hello there…

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Well how about that, looks like my snarky post was discovered by the big league valley blog mafia, dragging a couple new readers my way. Go figure. I've gotten some emails and comments. Might as well address a few of them, paraphrasing below:

Who the hell are you, I bet Jason Calacanis has done more in this weekend than you've done in your life, he's rich, you're not, blah blah blah.

Well, I'm not sure we've met, do I know you? Click the about link if you're bored. I've done a few things in life that are pretty interesting, but that's not the point, methinks. I do know what the f*ck I'm talking about when it comes to economics, however, hence my comments. Test me. 

Here's a few criticisms:

Your thinking is all old-economy, too 20th century. Jason's talking to the community of tech entrepreneurs, startup executives, and the like. It's not all about making widgets.

Jason's email was called the 120% Solution. He did define the problem as the current macro trend facing the US economy. He even said it wasn't the worst crisis that our country has ever faced. I didn't generalize, he did. 

So he offered a solution. And that solution wasn't just the part about working an extra 20%, that was only a part of the reccomendation. The other part involved ratcheting back
consumption drastically. 

The reality is on a macro level those two things just aren't compatible. That's why calling it a solution was so funny to me. It's a recipe for complete disaster. It's pouring gasoline on a fire. 

At least as far as the economics part went the main argument boils down roughly to this sentence: "Hi America. You have a big problem now, caused by overcapacity and slackening demand. I recommend drastically increasing capacity and slashing demand further." 

My argument is, well, no, that's a really bad idea. 

And I can explain why.
But the advice could have well made sense if it was a little more specific.
It's not bad advice for a young knowledge worker, or startup CEO. Presumably
that's the audience of the email, and the readers of Valleywag, and the excuse for some tunnel vision. 

But one commenter said this, essentially questioning my assumption that working an extra 20% is about more than just a raw increase in production, saying this:
 

I think he has a very specific idea of what we should be toiling for: not producing more factory goods, but innovating services and improving the tech infrastructure.

Well he should have said that. He didn't. Based on what he said my assumption is correct, in the aggregate. 

Most people in the economy are not engaged in work that involves innovating services or improving the tech infrastructure. It's a big world out there.
And it's not just factories, though there are quite a few of those. How about ironwork riggers, carpenters, floor sanding guys, fast food workers, airline flight attendents, sandwich makers, supermarket butchers. I could go on and on. 

It's not realistic to expect these people to make the widget better by working another 20%. They're going to sand 20% more floors, or make 20% more sandwiches. That's the bulk of the economy, that's America. That's the world. 

The vast majority of the labor force is not in the business of innovating anything.
Even in the knowledge worker set, it's not a panacea. Should advertising executives work 20% more to make more ads, or to make their ads more clever?
Maybe they should. Personally, I'd advise that they do. I work my ass off. If you're reading this maybe you do too. Maybe Jason's email would make for great life coaching. 

But what's that going to do for our economic slump? The advice is going to make it worse.
If you're not talking about a solution to macro problems you don't say stuff like this, straight from Jason's email:
 

Many intelligent people I’ve been speaking with believe that the
economic crisis facing our country today is our biggest challenge
since America’s inception… I’ve been thinking a lot of what got us into this mess and how we might be able to get out of it. What follows are my extremely basic thoughts on what has caused the problem and what the solution might be.

Sorry guys. This conversation is about macroeconomics. If you're going to talk about macroeconomics and you don't know what the f*ck you're talking about don't be shocked when you're called out on it.

 

How can you really argue that working harder is bad for the economy. How can everyone working a little harder be a bad thing?

There's nothing wrong with this as en ethos or philosophy. I happen to agree
strongly with it. It's good advice. In fact in my response I said that this
is one of those things that's counterintuitive, it might be a good idea for
EACH of the people that does it, but if everyone does it then everyone is
worse off. I love those kinds of paradoxes, I geek out on them in my spare
time, just for fun, examples here or here.

But it's also worth noting that the solution was the combination of two main (bad) ideas, increased work
(without any sense of what "work" means for most people) and reduced demand.
On a macro level, as a "solution" for the current "problem" it's just
backwards.

On a personal level, and highly qualified and prefaced, it's
great advice. In many ways Jason wrote the same email about three weeks prior, except
instead of a solution to Americas problems it was a prescription for what a
startup founder should be doing right now. 

It was basically the same prescription. I actually replied to that one and said it was
smart and really insightful and thanked for writing it, it was thought
provoking. Then the same basic concepts applied more generally as a macroeconomic solution made me think damm, this is retarded. 

Not everything can be generalized from the personal experience of being a
tech innovator, being smarter or more creative than average, and being an
owner or manager. Most people aren't those things, and most of the economy
doesn't work that way. 

First email was great, the other one made me want to
write 1500 words in response.
   

No really, how can people working harder and more efficiently at their jobs destroy jobs? That makes no sense.

I said it was counterintuitive. That doesn't make it wrong. There are at least 80+ years of economics devoted to actually studying and understanding concepts like this. You know, by actually studying them, using math, testing assumptions. Not going with a Colbert-esque "gut feeling." 

It's much easier just to refer to John Mayard Keynes on this exact issue as he's the genius, I'm just some guy who's actually read the stuff. 

But it shouldn't be that hard to grasp. Let's simplify further. 

If one guy can do the work of two, the second guy is surplus and unemployed.
Less jobs. 

A leads to B. 

Which part of the above is confusing? 

This holds unless there's demand for twice as much work to be done, and people willing to pay for the extra output, so both guys keep their jobs, but the world
gets more out of them. The obvious criticism would be that if one man can do the work of two, that's good. That's more efficient and thus a goal, it's a good thing for the economy.  

Well the obvious response is good for whom? Certainly not the guy who just got surplused. I'll refer back to Keynes, who demonstrated quite convincingly that the economy can just contract and exclude huge numbers of people and idle large quantities of resources, and that this is not self-correcting. 

The trick is to get the second guy working. Having half the world's population unemployed and starving is a market failure. And just to be clear it's not only bad for the half that's starving, it's bad in general. The rich and owners of capital fare better under full employment as well. 

This argument is pragmatic, not socialist. Every business owner presumably is not just concerned about the cost of their own employees. I don't know a business that doesn't require customers. You can't speak to broader issues without having some sense of both the supply and demand side.

If one man can do same work two used to do, and both men can continue to work because this improvement in efficiency translates to more demand then it leads to more wealth. That's called economic growth, that's what Jason thinks he's advocating in that email. 

But his prescription has two sides. The combination of the two of them is
what makes it a disaster. If we could convince everyone to work 120% more
and spend 120% more, we'd be closer to the right track. 

But on the level of macroeconomics, or when presented as a solution to the massive economic crisis we face (which as I pointed out above, wasn't me over generalizing, the idea that this was a solution to a national or global problem was the main thesis of his argument) the two main points are working at cross purpose. 

The "solution" is encouraging more production and less demand for that production. Those two things are incompatible. 

The analysis and recommendation are deeply unsound.

Jason Calacanis Made Me Do It

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I'm a big fan of Jason Calacanis, he's one of the most compelling writers out there, smart as hell and never afraid to speak his mind, defend it, and damm the consequences.

He has an email. It says you're not supposed to reprint it, it's just for email. Or maybe not, as the case may be.

The latest one is called "The 120% Solution." It proposes some, shall we say, innovative, ideas for facing our current economic crisis. I'll skip over a bunch to keep it from being too tedious, but let's start at least at the beginning:

Many intelligent people I've been speaking with believe that the
economic crisis facing our country today is our biggest challenge
since America's inception.

This is an oxymoron. Let's compare the civil war, 1950-60's threat of nuclear annihilation, the direct attack on our soil by Axis powers. Or, um… a recession consisting so far of a couple consecutive quarters of negative GDP growth.

Let's pick two random examples:

  • Example A: Civil War – 2% of the entire U.S. population is killed in battle.    
  • Example B: 2008 – GDP is found to be declining at half a percent annualized. Investment banks fail. 

Apparently, my definition of "intelligent people" differs from Jason's. But moving on…

I'm suggesting that, until America takes care of its debt, untangles the housing mess and gets unemployment under control, we all commit to working six days a week. Yep, move the standard 35-40 hour work week right up to 48 hours.

This is actually one of those very interestingly counter-intuitive situations you come across sometimes in economics. Having everyone work additional hours will actually be disastrous to the economy.

This seems impossible and like I said, counter-intuitive. But it's true. Think about the most basic economics, supply and demand.

(visual aid here)

You're moving the supply curve to the right by doing this. In other words, because people are getting paid the same wage but produce more goods, at the same price point there is an additional supply of goods. (We have to assume he's made that assumption rather than talking about hourly workers here getting paid overtime for this extra work, right?)

But the problem in the economy right now is facing drastically falling demand. Or the demand curve is moving to the left. If you think about supply and demand curves you can get a sense of what happens next. A massive deflationary spiral. Google: "Japan's lost decade"

Or to be more colloquial, there's no such thing as a free lunch. Right now we're facing a demand side recession. People are buying less, they are borrowing less, spending less, and reducing the demand for goods. This problem cannot be solved by suddenly and drastically increasing the amount of goods available. The solution presented here is entirely supply-side based. Let's try it and see what happens, we won't like it.

There are many examples of things which are prudent for a single economic actor to do, but are disastrous to the economy in the aggregate. And lo and behold, reading further we come across a couple of the most classic examples:

If you've got credit card debt, pay it down if you can.


If you've got a mortgage, pay it off if you can.

This is part of the problem. So everyone goes to work longer and works harder and makes more stuff. Let's call them widgets, economics types love to call imaginary products and services widgets.

OK, so your team is all in there on Saturday cranking out an additional 20% more widgets. Mind you, they're not getting paid 20% more, just spitting out 20% more goods and services.

Simultaneously, the savings rate is skyrocketing. That's what paying off debt means of course, paid off debt is savings. Since incomes/wages haven't increased, and that money going to pay down debt is no longer being used to buy products and services (or shall we call them widgets?) then people don't need as many widgets and when they go to the store they buy fewer of them.

Meanwhile, thanks to Jason's advice the factory is cranking them out now with far more efficiency like there's no tomorrow. Widgets, stacked to the rafters. 

Are we starting to see what's wrong with this picture yet?

I'll save a pedantic part right here and assume the seven people reading this far down can figure out where this is going. It's called turning a moderate recession into a full-fledged economic collapse.

Interesting advice, but, sadly, severely misguided.

OK, let's skip over some other stuff, and on to the summary:

In summary


What made America great was our ability to innovate and create
world-class products, ideas and services that people around the globe
fell in love with and wanted for themselves.

Can't disagree completely. It's hard to ignore things like extracting resources from nearly every region of the world at the barrel of a gun for 200 years, or the massive economic benefits that accrue from becoming the world's default reserve currency. But innovation's no small part of it either, undoubtedly.

From health care to human rights, from democracy to dishwashers, from windshield wipers to the World Wide Web, from search engines to soda pop, we've accomplished so much by dreaming and rolling up our sleeves.

Heh. We've invented many things. But what I'm most amused by as an American myself is our ability to be so self-centered that we do things like claim credit for most of the world's civilization. Or creating the World Wide Web, say.

Fun facts sidenote, check this out.  (Hint: The "E" in "CERN" stands for European, as in Switzerland, where Tim Berners-Lee, an Englishman, was working at the time. But regardless. We, um, made it great too. Without any help or anything, or something.)

Oh, PS: fun fact number two is that Americans didn't invent soda pop either.

But whatever. Go America!™

We need to put down the remote, cut our credit cards in half and start
new companies with new ideas. Our entrepreneurial spirit and hard work
will get us out of this mess.  All we need to do is release them.

OK, we're at the end here, so let me see if I've got this. Step one: put down the remote and see if you can annihilate the media industry. Got it. Step two: slice up them credit cards and wipe out the retail sector.

Then start a business and sell things to people! Don't start an online business though, as everyone just cut up their credit cards in step two and will need to pay by cash or barter. But work hard.

Because hard work and persistence trumps having a f-cking clue about macroeconomics.

Or so it seems.


UPDATE: Looks like I have some visitors, thanks to Owen. Interesting. I've updated and expanded on a few of the arguments, and counter arguments here.

In which I bastardize the phrase “Corner Solution”

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The End Of American Capitalism

And so on. I think the latest round of ignorant economic arguments have started to drive me a little bit crazy. There’s an ongoing sort of battle in economics, more accurately pop economics, or theories of business and policy, that seems to find it impossible to argue without resorting to what I’d call a corner solution. Or said another way, the “it’s all based on this one thing, and everything else doesn’t matter” type solutions. And to me it tends to be instructive to note who advances these arguments, and what their interests are.

It’s not surprising that the entrepreneur class would gravitate towards a theorist who postulates that said class is the root of all virtue and creator of all value, like a Joseph Schumpeter, or the many others since, and their passel of magazine covers and business books sold in an airport near you.


The entrepreneur class finds this interesting.

As an aside, I most certainly enjoy articles that say people named “Nick” tend to me more attractive and successful. For some reason such arguments resonate strongly with me.

It’s not surprising that the vast classes of salaried employees might have gravitated towards the Labor Theory Of Value. It’s not shocking that as the industrial revolution came into full swing, the allure of communism was extremely attractive for large numbers of people around the world. It postulated that the vast masses were the root of all virtue and creator of all value.


The vast masses found that interesting.

It’s not surprising that people who already had successfully acquired wealth and paid quite a bit in taxes gravitated towards people like Arthur Laffer and supply side theories. It’s hardly a shock that people who the market had deemed to be winners would advance the theory that the market is always right, and that it always distributes resources with perfect efficiency. People like Lucas and Sargent and Friedman on the academic side, or Ayn Rand (god help us all) on the pop culture side said that the rentier class was the root of all virtue and creator of all value.


The rentier class found that interesting.

There’s an entire industry devoted to privatization of everything. They’re not interested in discussing the details, asking if privatizing X really leads to more efficiency. Hard to figure out why, until you notice, of course, that they’re the ones looking forward to getting their hands on the assets. You could argue that the private sector does everything more efficiently. It’s a good way to get a contract providing armed soldiers to the US military at 10 times the cost of just having actual, you know, soldiers do the same job.


The advocates of privatization find that interesting.

It’s sure hard to figure out how these theories spread, isn’t it. The reality of course is that a well functioning economy is created by a mix of inputs. Corner solutions don’t work. Total state ownership of the means of production (communism) strips incentives and leads to corruption and terrible allocation of resources. We’ve established that didn’t work. Well sort of, China hasn’t done too badly lately has it, and they are nowhere near an open economy.



In contrast total privatization leads to a mafia state, an oligarchy of one dollar = one vote. Check out what happened in Saipan and the Marianas over the last couple decades for a good idea of what a privatization and entrepreneurship utopia looks like. It’s not so good.

Here’s a quick two theories, let’s throw them out:

1) Markets are probably the most efficient and effective way of allocating resources and creating wealth.

2) Markets almost never work properly without some oversight and command of state authority.

Here’s the kicker: Ideas #1 and #2 are not incompatible.

Prosperity requires effective flow of capital and capitalists and the ability for people to have incentives to innovate and invest and assume risk and reap rewards. It also requires government intervention where market failures occur (like making sure insurers are properly capitalized, or to break up monopoly situations) and to stimulate things that the private sector can’t or won’t efficiently create because of excessive time horizons, risk, coordination issues, or capital requirements (things like the interstate highway system, the internet, air traffic control, etc, for example).


It also requires a properly compensated, healthy, educated, and stable workforce. One that’s able to make rational decisions, live with some risk mitigation to income or life events, and not constantly subject to monopsony pricing of their wages. Not only does it lead to increased efficiency, and greater wealth for all classes, it does have the not at all insignificant side effect of keeping those excluded from the economic system from scaling the iron gates and running up on the lawn with guns drawn. As they say.

It’s been an amazing and historic week. An inspiring one, no matter which side of the aisle you’re on. I would hope. But it’s sad to see that the same tired arguments prevail, on the right, but on the left as well sometimes.


Capitalism is dead. Long live Capitalism. No we can’t have national health care it’s socialist. Multi-national corporations are evil. All rewards are due to the innovative class, labor is valueless and fungible.

And so on…

The reality is that entrepreneurs, bankers, investors, academics, inventors… and yes, government regulators, bureaucrats, factory workers, and cashiers all contribute to prosperity. All or nothing attitudes are kids stuff.


Or more often, the refuge of those who have a vested interest in advancing the interests of the group they most identify with. As it’s been said, It is difficult to get a man to understand something when his salary depends upon his not understanding it.

And now, I will blog about a story about blogging.

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Or more accurately a story about blogging as it relates to real estate, that ran in today's New York Times. 

Yup, that's me. I remember vividly — this must have been more than a few years ago — listening to my friend Jason Calacanis say something to the effect of "If your company doesn't have a company blog you're an idiot. Every company must have one, and it's one of the most efficient and effective ways of communicating with your customers. If you're not doing it, it's a giant missed opportunity." Or words to that effect. At the time I figured it might have been a bit of hyperbole, and of course at the time Jason's day job was building and promoting a company entirely composed of blogs, it wasn't a neutral point of view. 

But it was a comment that really stuck in my head for awhile. How? Why? Do people really care and want to read what's effectively a newsletter? Learn about your office party, or how excited you are about your new product rollout, or what you think about your industry, or the latest interesting article you read somewhere?

The answer is yes, and I think Jason (yet again) has proven to be highly prescient. I guess it's the same thing I said in the story that leads off this post. It's a way to really communicate with your audience in the first person, it's a medium well suited to a unique mix of information, opinion, and personality. When a blogger is well informed and has the background necessary to contextualize information it's one of the best ways to keep your finger on the pulse of some thing, someone — or some company. Your company. A concept anyone with customers, and prospective customers, would be wise to consider.

The concept is not new, but apparently, it's still news.