Let's hope "zombie companies" don't become a zombie idea

The OECD has a certain reassuring predictability. When explaining a perceived crisis, they will conclude that the country needs reforms and it needs market-based solutions and, most of all, it needs reforms that unleash market-based solutions.

I first noticed this pattern when I was following the education reform debate (where the OECD figured prominently). I also noticed something else. Though the organization put out reams of impressive looking studies and data, the actual arguments tended to have a context-free snapshot quality. “This country is not following our list of rules and it is in trouble.” It didn't matter that the country had never followed the rules and had previously been doing fine or that some other country (in the case of ed reform, usually Canada) was even further from the OECD prescriptions and was doing great.

Which brings us to this recent piece by Catherine Mann and Dan Andrews (chief economist and deputy head of the structural policy analysis division, respectively, for the OECD).

Second, in well-functioning markets we would expect strong incentives for productive companies to aggressively expand and drive out less productive ones. The opposite has happened. The propensity for high-productivity companies to expand and low-productivity companies to downsize or exit the market has declined over time. This pattern is evident in the U. S. and is particularly stark in southern Europe, where scarce capital has been increasingly misallocated to low-productivity firms.

Third, across the 35 countries in the Organization for Economic Cooperation and Development, we are seeing a drop in the dynamism of the business sector. Not only has the share of recent entrants into the market declined, but marginal companies, which would typically exit or be restructured in a competitive market, are more likely to remain. At the same time, the average productivity of these marginal businesses has fallen. In other words, it has become easier for weak companies that do not adopt the latest technologies to survive.

The survival of weak companies drags down average productivity, but the consequences for growth are even worse. Since such firms take up scarce resources, their prolonged survival (or their delayed restructuring) inflates wages relative to productivity, depresses market prices and undermines investment -- all of which deters the expansion of productive companies, particularly startups, and amplifies the mismatch of skills.

Today, the risk is that this phenomenon may contribute to a period of macroeconomic stagnation, as occurred in Japan during the 1990s.
...

There is no single fix to the productivity problem. But, over time, a strategy centered on encouraging innovation in firms, facilitating entries and exits from the market and helping workers retool can combat the structural weaknesses afflicting advanced market economies. Clearing the path for higher productivity growth is the surest way to ensure that economic expansion helps workers and doesn’t fizzle.

Just to be clear, I am not necessarily opposed to many (perhaps not even most) of these proposals. Furthermore, I certainly agree that we should make it easier for badly run businesses to go away (though my definition of "badly run" may be different than that of the authors). That said, there is a great deal here that gives me pause and it is entirely consistent with the pause-giving elements of other OECD studies.

One troubling aspect was particularly well illustrated by the mention of Japan. Many of the policies that the organization objects to have been in place for a long time, and during that time, many of the countries used as examples have had both very good and very bad economies. For example, I'm under the impression that Japan has long had official practices in place that make innocent young freshwater economists cry themselves to sleep, but those same practices were in place during both the boom of the 60s, 70s, and 80s and the bust that followed. Likewise (though to a lesser degree) the United States has experienced highs and lows in the past few decades that seem unconnected with the reforms the OECD proposes.

And, with the all-important caveat that I am desperately out of my depth, I would assume that the more competitive and uniform markets of the European Union and the far greater employee mobility (at least until last year) would have been just the sort of reforms that the authors insist are the best way of fighting our economic woes.

I am even more troubled by the chronology with respect to the claims about the impact of bringing down barriers to entry for new businesses. The trouble is that we have seen a recent and, as far as I know, unprecedented drop in these barriers due to the rise of the Internet and mobile, and it happened…

Right…

About…

Here.

Once again I'm not saying that the proposals are bad and I am certainly not arguing that barriers to entry for new businesses are good; I am just saying that, even if our friends from the OECD are getting the direction right (which they very well may be), it is difficult to reconcile the magnitudes of impact they promise with the historical record.

The genre is sci-fi. The business model is fantasy.

One of the hallmarks of a bubble is the strange inversion of perceived risk. You get to a point where, for the people driving the bubble, the pain and anxiety of loss associated with missing out grow overwhelming. The only seemingly rational course of action is to do what ever it takes to get into the game. No matter how onerous the terms, no matter how many treasured possessions you need to hock, no matter how far you need to overextend yourself, the sensible course is to invest as much as you can.

Obviously, there are situations where "getting there the fastest with the mostest" is the best strategy, but even then, the smart investor or executive will at least acknowledge the inevitable point when blank checks will need to give way to caution. When the assumption that more spending is always better becomes axiomatic, the smart money starts backing toward the door.

Which brings us to a recent story from io9.

We were early to the party when it came to talking about the possibility of a content bubble. The basic idea is that while, even allowing for multiple screens (I've got two running myself at the moment), the competition for viewers has gotten brutal between cable and satellite, pay-per-view, streaming video, and our old friend digital terrestrial broadcasting. (We won't even get into games.) In particular, the share allotted to cable and satellite has been steadily shrinking, so that even allowing for population growth and the opening of international markets, this sector is, at best, holding its own.

At the same time, the amount of programming, particularly original scripted programming, has exploded. On top of this, there is something of a bidding war so that increased supply is actually met with spiraling prices. Obviously, this does not mean that investing big bucks in a TV series or the broadcast rights to a major movie franchise is necessarily a bad idea, but it does mean that the decision to open up the checkbook carries notable risks in the middle of a bubble.

What's so troubling about the following from a business perspective is that NBC Universal Cable Entertainment’s President of Entertainment, Chris McCumber doesn't even seem to consider the possibility.

Of course, all of that is window dressing compared what Syfy will actually put up on screens. McCumber said the goal was to go back to high-end, scripted television, with four focuses: space and scifi, fantasy, paranormal and supernatural, and superheroes and comics.

The Expanse and The Magicians are clearly the network’s flagship returning shows, mentioned many times and with pictures all over the presentations. For new projects, it was announced Tuesday night that Happy!, the adaptation of a Grant Morrison comic starring Christopher Meloni that was announced last year, will get a full season. Similarly, the Superman prequel Krypton has a full series order.

…

The channel has also paid a historic sum of money for Harry Potter and Fantastic Beasts and Where to Find Them. It’s going to have some of the Marvel movies on it. Syfy wants to be the home of everyone’s content, in some way or another.

Bialystock's Paradox and von Hoffman's Dead Rat Problem

[Brief caveat. I have only a cursory knowledge of Watergate so I may be getting some of the history wrong. Fortunately, most of my readers are better informed than I am.]

Picking up from here...

First off, a bit of background courtesy of Wikipedia:

Nicholas von Hoffman (born October 16, 1929 in New York City)[1] is an American journalist and author.
...

Von Hoffman was fired by Don Hewitt for referring to President Richard Nixon, at the height of the Watergate scandal, as "the dead rat on the kitchen floor of America, and the only question now is who's going to pick him up by his tail and throw him in the garbage."

Von Hoffman's dead rat is one of many examples of how the Trump scandals turn the dynamics of Watergate on its head (it also reminds us how little predictive value there is in the Trump/Watergate analogy).

At the risk of being one of those counterintuitive types I'm always complaining about, the Republicans were lucky not to hold Congress during Watergate. The Democrats had to pick up the rat; all the Republicans had to do was hold the door through a reasonable level of cooperation across the aisle and an occasional show of independence from the president. The GOP certainly took a hit, but it was probably the best they could do under the circumstances. Furthermore, they were able to avoid intra-party war and exchange a huge and growing problem for a useful martyr.

To go just a bit further down the counter-intuition rabbit hole, I suspect that a significant number of Republicans in Congress are hoping that enough of their colleagues lose their jobs in 2018 so that this disposal job can be handed over to the Democrats. Of course, there are two obvious problems with that strategy. First, it is impossible to guarantee that it will be a colleague who goes down in the tsunami. Second, November 2018 is a long ways off and, if the pace of the scandal holds (or even gets worse), association with Trump has the potential to do a stunning amount of damage between now and then.

Understanding Ailes

This Gawker (R.I.P) article does an excellent job showing the connection between Ailes, the Nixon White House and the beginnings of the social engineering experiment we call the conservative movement (of which Ailes was a primary architect):

Roger Ailes' Secret Nixon-Era Blueprint for Fox News by John Cook





While this Sherman interview is the best concise take I've heard on the rise of Fox News.

The Content Bubble and the Consideration Deficit

I probably need to do a deep dive one of these days and explore the connection between the content bubble and the larger story of how hype and next big thing-ism drive and distort markets. For now though, I'm just trying to document how big and overpriced and unsustainable the explosion of original scripted television (and the marketing budgets behind them) has become.

With Emmy season approaching and with easily a thousand square miles of LA County lousy with "For Your Consideration" billboards, Ken Levine has a post up that perfectly illustrates the point:

With 455 scripted shows and God knows how many unscripted shows out there, it’s shocking how many television programs I’ve never heard of. In some cases, I don’t even recognize the network. Elaborate programs too (at least based on the cover art).  Costume dramas and battle scenes and crucifixes.

And as I thumb through them one by one I feel a certain pang of guilt. There may be two or three of these shows that are really terrific. Some very talented and dedicated people poured their hearts and souls into these shows. And the studio must’ve spent a fortune sending them out. Some of the boxes and packaging is extraordinary. They should give out an Emmy for packaging.

But Jesus, life is too short. And if there is a series I do want to watch they often only include a couple of episodes. Sometimes they also provide a code so you can watch the series in its entirety on line. So there’s thirteen hours, or more precisely – twelve hours I won’t be watching something else.

$99,744,920

There is a huge distinction between the automobile industry (even the specialized area of electric vehicles) and the aerospace industry. The latter has a handful of players competing for a tiny number of clients; the former has lots of players competing for most of the population in the industrialized world.

SpaceX was able to carve out a substantial niche for itself because the industry was not particularly fast-moving (and, in part, because the company acquired, or by some standards stole, a large chunk of the personnel and intellectual property from TRW).

Tesla, by comparison, is entering a free market thunder dome.

As of September 2016, series production highway-capable all-electric cars available in some countries for retail customers released to the market since 2010 include the Mitsubishi i-MiEV, Nissan Leaf, Ford Focus Electric, Tesla Model S, BMW ActiveE, Coda, Renault Fluence Z.E., Honda Fit EV, Toyota RAV4 EV, Renault Zoe, Roewe E50, Mahindra e2o, Chevrolet Spark EV, Fiat 500e, Volkswagen e-Up!, BMW i3, BMW Brilliance Zinoro 1E, Kia Soul EV, Volkswagen e-Golf, Mercedes-Benz B-Class Electric Drive, Venucia e30, BAIC E150 EV, Denza EV, Zotye Zhidou E20, BYD e5, Tesla Model X, Detroit Electric SP.01, BYD Qin EV300, and Hyundai Ioniq Electric. As of early December 2015, the Leaf, with 200,000 units sold worldwide, is the world's top-selling highway-capable all-electric car in history, followed by the Tesla Model S with global deliveries of about 100,000 units.

If you include plug-in hybrids (which I would argue that you should for now), the list becomes much longer.

The consensus in the engineering and infrastructure fields seems to be that we are not that far from the end of the age of internal combustion. I'll admit I am a bit skeptical about some of the timetables I've heard, but there is no question that we will get to the point where electric vehicles are cheaper, have better range, and can be charged in roughly the time it takes to fill up your car. When that happens, gasoline powered cars will go the way of chemical film and analog records, continuing to exist but only as a pale shadow of a once dominant technology.

It is possible I'm missing one or two obvious exceptions, but as a rule, it is next to impossible to be wildly profitable in the presence of intense and genuine competition. If you look at companies that were basically printing money by the truckload and take out those that lucked into a quick windfall or were cooking the books, you would almost always find monopolistic pricing/rent seeking or underserved markets or some combination of the two.

It remains an open question whether or not Tesla can be a viable and consistently profitable company going forward (a sober reading of the company's recent history does not strongly support the notion), but even if the company goes on to a long and successful career as a major player in the industry, it is highly unlikely that it will ever have the kind of limited competition needed to be profitable enough to justify its market cap.

That also means it probably will never be profitable enough to justify things like this:

Meanwhile, Tesla CEO Elon Musk was just barely out of the nine-figure club, earning $99,744,920 last year, according to Bloomberg’s calculations.

How things got this bad -- part 4,675

I was digging through the archives researching an upcoming post and I came across a link from 2014. It led to a Talking Points Memo article that I had meant to write about at the time but had never gotten around to.

Since then, we have learned just how much the mainstream media was covering for Roger Ailes. Ideological differences proved trivial compared to social and professional ties and an often symbiotic relationship. We have also seen how unconcerned the mainstream press (and particularly the New York Times) can be a bout a genuinely chilling attack on journalism as long as that attack is directed at someone the establishment does not like.

It was a good read in 2014, but it has gained considerable resonance since then.

From Tom Kludt:

Janet Maslin didn’t much care for Gabriel Sherman’s critical biography of Roger Ailes. In her review of “The Loudest Voice in the Room” for the New York Times on Sunday, Maslin was sympathetic to Ailes and argued that Sherman’s tome was hollow. But what Maslin didn’t note is her decades-long friendship with an Ailes employee.

Gawker’s J.K. Trotter reported Wednesday on Maslin’s close bond with Peter Boyer, the former Newsweek reporter who joined Fox News as an editor in 2012. In a statement provided to Gawker, a Times spokeswoman dismissed the idea that the relationship posed a conflict of interest.

“Janet Maslin has been friends with Peter Boyer since the 1980’s when they worked together at The Times,” the spokeswoman said. “Her review of Gabe Sherman’s book was written independent of that fact.”

Follow me on Twitter (no, I really mean it this time)

I know I haven't been the best tweeter in the past. I played with the idea now and then of being more active, but, given the huge backlog of things I want to write about here and on other forums, it never seemed a justifiable investment of time.

Recently, though, I flipped the question around. For me, unfinished work is a subtle, shaded category with lots of gradations. The lowest and most common was the hyperlink to an article or post I wanted to write about or share sometime the future. Keeping up with these links has gotten to be a real pain. It struck me that the work involved in noting and keeping up with all of these interesting articles was probably greater than the work required to put them in a Twitter stream. Of course, that still leaves me with the challenge of finding time to write up all these posts, but those I don't get around to will at least have gotten out in the form of tweets.

So, if you are active on Twitter, please follow and retweet liberally.

Thanks again for the support.

Mark

Using the outcome as a conditioning variable

This is Joseph.

Felix Salmon has a great comment on Facebook and Female Coders:

To spell it out: The more your code is rejected, at Facebook, the less likely you are to rise up the ranks. So the fact that women suffer from significantly higher levels of code rejection is a big problem. The evidence for this being a problem is precisely the fact that Facebook’s female engineers are disproportionately found at lower levels rather than higher levels. 

And yet somehow, Facebook has contrived to use that fact in support of its claim that there isn’t a difference in how male and female engineers at the company are treated. Instead of treating the prevalence of men in the upper engineering ranks as prima facie evidence that there’s something amiss, they use it to exonerate themselves of sexism.

As Thomas Lumley notes, conditioning on the outcome rather ensures that the model is unhelpful (I found this article reading his most excellent site).

What would be interesting to see would be what would happen if you randomized some gender swapping on the code authorship.  Or were able to blind reviewers to the gender of the code author; that would likely have some pretty positive consequences.  Because another consequence of this finding is that either some sub-par code gets accepted or some good code is being rejected.  You would assume that a private company would want to correct this issue, either way.    

Josh Marshall has my favorite ready-to-mix metaphor of the whole sordid affair

As a fan of the extravagantly mixed metaphor, I wish Marshall had jammed these two together, but they are both good enough to stand alone, funny and remarkably apt.

Last night came word that Deputy Attorney General Rod Rosenstein reportedly threatened to resign Tuesday night when he realized that the White House was making him the key decision-maker in the firing of James Comey. This tells us a lot, but not necessarily what it might appear on first notice. The main significance is that no more than 30 hours in, the White House’s absurd cover story about firing Comey over his misdeeds toward Hillary Clinton – a lie that virtually everyone at the White House has now publicly repeated and vouched for – is coming apart at the seams. We can also see the staggering fact that after no more than two weeks on the job, Rosenstein’s public reputation, which was formidable, has been destroyed. He now joins a legion of Trump Dignity Wraiths, men and women (though mainly men) of once vaunted reputations or at least public prestige who have been reduced to mere husks of their former selves after crossing the Trump Dignity Loss Event Horizon.

…

What Rosenstein seems not to have realized was that Trump would blame him firing on him. To put it in mafia terms, ‘I said I’d help you whack Carlo. But you didn’t say you’d tell everyone it was my hit!’ This is why Rosenstein’s threat to resign rings hollow and indeed why I suspect he hasn’t resigned. What’s his argument? That he knowingly participated in the bad act and put his legal knowledge to work justifying it but is outraged that he’s being asked to take the blame?

And now our video accompaniment. First on the subject of event horizons. Before buying the Star Wars franchise, Disney first tried to make their own knockoffs. It did not go well.




Going from the ridiculous to the sublime... When the subject is mafia hits, particularly hits with nasty unexpected consequences, there really is no other choice.

Charles Pierce continues to hammer away at the differences between 1974 and 2017

We've been making the point for ages now that, while the legacies of Goldwater and Watergate are important, the analogies to today are deeply problematic. The differences are, if anything, more important than the similarities.

As noted previously, veteran political observer Charles Pierce was pointing out this contrast even as the Trump White House was preparing to announce the firing of Comey. The next day, Pierce made the same point even more forcefully. 

On July 25,1974, the House Judiciary Committee opened debate on the articles of impeachment. A congressman named M. Caldwell Butler said:

    "For years we… have campaigned against corruption and misconduct…But Watergate is our shame."

And a congressman named Lawrence Hogan said:

    "After reading the transcripts, it was sobering: the number of untruths, the deception and the immoral attitudes. By any standard of proof demanded, we had to bind him over for trial and removal by the Senate."

And a congressman named William Cohen said:

    "I have been faced with the terrible responsibility of assessing the conduct of a President that I voted for, believed to be the best man to lead this country, who has made significant and lasting contributions toward securing peace in this country, throughout the world, but a President who in the process by actor acquiescence allowed the rule of law and the Constitution to slip under the boots of indifference and arrogance and abuse."

And a congressman named Thomas Railsback said:

    "I wish the President could do something to absolve himself."

And a congressman named Walter Flowers said:

    "This is something we just cannot walk away from. It happened, and now we've got to deal with it."

All of these congressmen voted to send the articles of impeachment to the full House.

On August 7, 1974, two senators named Hugh Scott and Barry Goldwater, along with a congressman named John Rhodes, went to the White House and told Richard Nixon that his removal from office was inevitable. Nixon resigned the next day. Now, looking back from the swamp in which we currently find ourselves, there is one remarkable thing about all the people whose actions in that perilous time showed what stuff of which they and the country were made.

They were all Republicans.

Every damn one of them, from Sirica to Goldwater and back again. They all did their duty, as best they saw that duty and, as a result, a Republican president was forced to give up an office he'd won in a landslide only one year earlier.

"Why doesn't anybody have enough anymore?"

One of the questions we've been discussing on and off for a while now is how the Republican Party has changed since Watergate, and what the implications of those changes might be as the Trump administration continues a seemingly inevitable spiral of scandal. With recent events, the question is even more relevant.

A few hours before the Comey firing, Charles Pierce (who knows a thing or two on the subject) provided us with and illustrative clip.




And a characteristically sharp commentary.

That's Senator Lowell Weicker, Republican of Connecticut, telling John Ehrlichman, a thug in the employ of the Nixon White House, that, whatever alibis Ehrlichman had concocted to excuse himself and his boss for their blatant criminality, Weicker wasn't having it any more. This was in July of 1973, a full year-plus before Nixon finally was run out of power. At this point, there was no telling whether the White House stonewall was going to hold or not. (The number who knew was pretty much limited to the guilty, and the shell-mouthed operatives of the Watergate Special Prosecutor's office.) Being an independent-minded Republican still carried a considerable political risk. Weicker did not care. He'd had enough. Why doesn't anybody have enough anymore?

Information from hacking scandals

This is Joseph.

I assume everyone has read Nate Silver's take on the Comey letter by now.

In that context, Josh Marshall has a very good set of points as to how information leaks hurt the recent US presidential election:

Second: The FBI Director broke all precedent and DOJ guidelines to announce a criminal investigation into what proved to be the losing candidate just over a week before the election. There was little reason to believe the purported new evidence would lead to any criminal charges or indeed even any substantial new evidence. And it turned out that the ‘investigation’ was based on nothing. The entire blow up turned out to be based on nothing and knowing what we know now about what investigators and Comey knew at the time suggest he had little reason to think there was anything there.

Third: A rival foreign power ransacked the computer files and email logs of the losing candidate and strategically leaked them out over the final months of the campaign with the intention and the effect of distracting and damaging what proved to be the losing candidate.

Now look at France and their episode of hacking.

This suggests to me that we need to move past the nice but naive idea that leaks can ever be non-political.  The idea of more information always being good isn't false, but we need to acknowledge that a selective information leak affecting one party is a very partisan act.  It isn't like we saw the emails and logs of both sides being released so that people could use "behind the scenes" information to make a more informed electoral choice.

Instead, the decision to hack or leak data should always be filtered via a question of what is the agenda of the person(s) who are releasing this data.

Trying to imagine the pitches that get turned down...

One of these days, we need to have a serious conversation about all of the Soylents and the Juiceros. We need to think about the opportunity costs of diverting hundreds of millions (billions?) into obviously laughable products and services. We need to consider the income inequality implications of a business culture (particularly in Silicon Valley) where having the right connections counts for more than viable business plans. We need to ask credulous journalists how they justified the shameless puff-pieces that invariably preceded the collapses.

For now though, I'm just here for the snark and schadenfreude.

Silicon Valley Can’t Stop Puking Money All Over Soylent by Adam Clark Estes

Soylent, a substance, is about to be everywhere. A team of queasy venture capitalists just invested $50 million into the company. This, despite the fact that Soylent is perhaps best known for lying about its ingredients and giving people fits of relentless vomiting and uncontrollable diarrhea.
...

The new round of funding is led by GV (formerly Google Ventures) and includes big shot funds like Andreessen Horowitz and Lerer Hippeau Ventures. That extra $50 million brings Soylent’s total pile of cash from investors up to $74.5 million. Rob Rhinehart, the original startup bro who hates food and invented Soylent, told Bloomberg that he soon hopes to sell Soylent “pretty much anywhere you can get a coffee.” That means you might win more opportunities to spend money in order to celebrate the dismal, dangerous future we’re all living in, whether we like it or not. Let’s hope those coffee shops have bathrooms, though. We’re gonna need it.

Preexisting conditions

This is Joseph

It looks like preexisting conditions may be back as a way to increase the costs of health insurance, and this is a bad thing.  Why?

In traditional insurance, if your house burns down then the insurer makes whole the loss.  In medical insurance, a major medical event may have sequels for many years.  If you change insurers (or your insurer goes out of business) then the original insurer is off the hook for continuing costs.  The new insurer looks at the ill participant as a "house already on fire" and would like to not cover these ongoing costs.

There is also an information issue.  If a house burns down twice then that might just be bad luck.  But if a person has two heart attacks, is the second one a random event or a sequel of the first one.  It is pretty clear that we don't want courts adjudicating this question on a case by case basis (or people being denied care because nobody can figure this out).

The most logical solutions are regulatory (like the Affordable Care Act implemented) or structural (like implementing single payer health care).  A portable system of health insurance might also work, although do you want to bet on your insurer being solvent for forty-five years?:

But there is a reason that preexisting condition clauses are unpopular.  Not because people want a free lunch (although some of that may always be present) but because it opens people up to random events (employer bankruptcy, anyone) leaving them unable to afford health care.

And before anyone talks about market solutions, please try and actually use "self-pay" as an option in a modern medical setting.  I actually tried this and it was very difficult to be seen by an MD (and only MDs can do things like prescribe antibiotics -- which can be life saving).