Month: December 2008

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.