Profit laundering

[I need to come back to this in more detail later, but just so it doesn't sit in the queue forever, here's a quick rundown of the concept.]

It's not always rational, but investors care a great deal about where the money comes from. Two companies with exactly the same cost and revenue numbers will often be valued very differently. Sometimes, the preferences are based on perceived possibilities for growth or fears about the future of a particular business or market. Other times, it comes down to the sexiness of the industry and/or the buzz and halo effect surrounding the company.

Obviously, management will do everything it can to put their businesses in the hot category. When a company has multiple sources of revenue of varying attractiveness, it will do its best to maximize the perceived portion of the money coming from the cool streams and minimize the perceived amount coming from the uncool.

We saw some really blatant examples of this in the 90s Internet boom – – companies using brick-and-mortar profits to create the impression of online success – – but it certainly preceded that and it's never gone away since.

The lesson that many investors and most business/financial journalists need to take away from this is that, whenever you have a company with multiple revenue streams, one or more of which is particularly sexy, you should always assume you are being to some degree misled about which stream is actually bringing in the profits.

Alec Guinness was George Smiley

If you can think of a piece of video, be it an old TV show, a musical performance, a stand-up routine, it's probably on YouTube. I've started making a note whenever I think of something I'd like to see (or see again), like this definitive adaptation of Tinker, Tailor, Soldier, Spy...



And of Smiley's People.

Of course, modern researchers tried talking to plants so who are we to judge?

I'd never heard of electro-culture before coming across this article from a turn-of-the-century issue of Scientific American, but, based on some quick googling, it seems to have been one of those scientific theories (like N-rays and, to a lesser extent, Martian canals) that had a brief run of acceptance and respectability before being dismissed by the scientific community and drifting into the area of fringe beliefs.

The big question reading this today is whether or not the original researchers were frauds or simply incompetence who did a bad job setting up their experiments.

The cover of the issue, depicting Russian battleships, has nothing to do with this article but it's too cool to leave out.

Tech Boosterism

[More notes for the upcoming book]

Journalists have a natural tendency to be supportive of efforts to serve some public good. There is undoubtedly an element of self-interest here – – philanthropists and local heroes make for good copy – – but I suspect of main driver is a sincere desire to advance worthwhile causes. This is completely understandable and even, to some degree, praiseworthy, but it can also be dangerous.

Accounts of volunteers cleaning seabirds after an oil spill can create a false sense of having addressed a massive problem. Feel-good stories about imaginative school fundraising projects (disproportionately found in relatively wealthy districts) seldom mention the ways that funding by community can exacerbate educational inequality. Press releases on hedge fund managers always omit the tax benefits, the strings that often accompanied the gifts, and the reputation laundering bought with what is frequently very dirty money (see the Sacklers and the opioid crisis for example).

The damage caused by uncritical and unthinking supportive journalism really kicks into high gear when you combine it with other biases and corrupting factors. This problem is particularly acute with technology. Most journalists quite reasonably see technological progress as being good for society on the whole. Therefore, the default setting of a report of some demonstration or new development is "isn't that great?".

Unfortunately, this default approach is generally combined with a weak grasp of how technology works and progresses, particularly when it comes to things like proposals, prototypes, and producing viable products. Add to that the tremendous role of hype, the enthusiasm for conventional narratives (in this case frequently involving Silicon Valley messiahs, often with what can only be described as magical powers -- see magical heuristics), and the occasional flat out scam. The result is a press corps that ranges from a mainstream that is strongly inclined to believe what they're told to converts with a cultlike faith in Elon Musk and company.

Keep in mind that back then $600 million was quite a bit of money

To provide a bit of historical context for our recent posts on infrastructure costs (see here and here), check out this piece from Scientific American in 1907.

The cover of the issue (comparing the NYC skyline to Niagara and Victoria Falls ) has nothing to do with this, but it's still pretty cool.

“I’m almost afraid not to take the chance,” – This is when it becomes a bubble.

It's that moment when risk aversion flips and the thought of not making money starts to feel like losing it. I'm not talking about opportunity costs in any kind of rational sense. Instead, I'm referring to having the visceral emotional reaction associated with a deep, costly loss because you didn't buy into the skyrocketing market the day before. People become afraid not to invest in what should obviously be highly risky ventures.

Truly crazy bubbles are driven by this paradoxical combination of greed and fear. They both desire instant wealth and dread the sense of regret that would go with missing it. Individually, either of these emotions can drive otherwise sensible people into irrational behavior. Together, they can spur investment in some laughably bad ideas.

This Washington Post piece by Chico Harlan on a group of Bitcoin investors perfectly illustrates the point.

“Us little guys working our butts off, we can’t get ahead,” Cedric Knight, 35, told Melin. “This is a once-in-a-lifetime opportunity to change my life.”

Knight and others visiting Melin were pinning their hopes on a new form of currency whose potential value the world was only beginning to recognize. Millions of people around the world are chasing after fortune by investing in bitcoin — which has soared by more than 2,500 percent in value in the past two years — and other digital instruments known as cryptocurrencies.

...

“What crypto allows is for the masses to be venture capitalists,” Melin said.

“And guys like me, I’m not in the loop,” Knight said. “This is my chance.”

…

Knight, meantime, went home, cooked dinner and then decided to reopen one of the eight cryptocurrency apps he had downloaded. His account had fallen nearly $500 on the day — his initial $1,500 was below $900 — and he said he was “freaking out.” But then, he thought about what it meant to be a cryptocurrency investor. There would be days such as this. But there might be better days, too — much better days. If there were, he did not want to miss out.

“I’m almost afraid not to take the chance,” he said, and soon, he added $260 to his cryptocurrency account.

Some historical perspective from the archives.

"A company for carrying on an undertaking of great advantage, but nobody to know what it is."

Another except from Charles Mackay's  Extraordinary Popular Delusions and the Madness of Crowds. I believe "a company for carrying on an undertaking of great advantage, but nobody to know what it is" was an initial business plan for Groupon.

Some of these schemes were plausible enough, and, had they been undertaken at a time when the public mind was unexcited, might have been pursued with advantage to all concerned. But they were established merely with the view of raising the shares in the market. The projectors took the first opportunity of a rise to sell out, and next morning the scheme was at an end. Maitland, in his History of London, gravely informs us, that one of the projects which received great encouragement, was for the establishment of a company "to make deal-boards out of saw-dust." This is, no doubt, intended as a joke; but there is abundance of evidence to show that dozens of schemes hardly a whir more reasonable, lived their little day, ruining hundreds ere they fell. One of them was for a wheel for perpetual motion—capital, one million; another was "for encouraging the breed of horses in England, and improving of glebe and church lands, and repairing and rebuilding parsonage and vicarage houses." Why the clergy, who were so mainly interested in the latter clause, should have taken so much interest in the first, is only to be explained on the supposition that the scheme was projected by a knot of the foxhunting parsons, once so common in England. The shares of this company were rapidly subscribed for. But the most absurd and preposterous of all, and which showed, more completely than any other, the utter madness of the people, was one, started by an unknown adventurer, entitled "company for carrying on an undertaking of great advantage, but nobody to know what it is." Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project. The man of genius who essayed this bold and successful inroad upon public credulity, merely stated in his prospectus that the required capital was half a million, in five thousand shares of 100 pounds each, deposit 2 pounds per share. Each subscriber, paying his deposit, would be entitled to 100 pounds per annum per share. How this immense profit was to be obtained, he did not condescend to inform them at that time, but promised, that in a month full particulars should be duly announced, and a call made for the remaining 98 pounds of the subscription. Next morning, at nine o'clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o'clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2,000 pounds. He was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again

Laws and markets

This is Joseph

This point, by James Joyner, is quite good:

The taxi industry is a special case, though, in that cab and limousine owners and drivers made economic decisions based on rules set by the government. While the medallion system is outrageous and I’m happy to see it disrupted, the fact of the matter is that it was the norm for generations. People saved up or took big risks in borrowing to bid on them based on guarantees from their municipal government. They have every right to expect that same government to either enforce the law against illegal competition or compensate them in some way for the broken contract.

The piece that is very important here is the decision to change the legal framework.  Disruption is normal and many people end up as economic losers when conditions change.  We are already bad at coping with that. 

But all markets are based on rules and laws.  We would have no markets at all if force and fraud where not prohibited, for example.  The piece that is dodgy here is the evasion of the existing rules in order to build a company.  It is fine to lobby to change the rules.  But when you have to design your business to evade local regulations then that is a problem.  Not because the laws are good -- they are likely not.  But because it is not the case that private actors who violate laws that they see as stifling innovation are left alone. 

And if government is wrong about a law and needs to backtrack then it makes sense to compensate the losers of the law change.  We don't let private property block roads but we do have to buy it back when we put a road in.  I think applying the same logic to shutting down taxi licensing agreements is sensible. 

The Snow Bicycle -- wonder why this never caught on

People at the turn of the century were fascinated by the bicycle, both as a practical form of transportation and as a sport. Being an age of great inventiveness, lots of variations were tried, some more viable than others.

I've been working on a project involving not only the technological explosion of the late 19th and early 20th Centuries (which introduced the huge hit Daisy Bell)...





... but also the post-war period (where the still remembered Daisy Bell would provide and interesting footnote).



Which inspired...

That New York Times piece on Tesla was even worse than I thought.

In case you missed part one,a few days ago, I took John F. Wasik and the New York Times to task for a piece that attempted to mythologize Nikola Tesla by distorting the historical record and omitting a number of pertinent facts. One passage I jumped on somewhat vigorously was the following.

Tesla proposed the development of torpedoes well before World War I. These weapons eventually emerged in another form — launched from submarines.

I pointed out that there was no way Tesla could have "proposed" the development of torpedoes in the late 1890s since the Whitehead self-propelled torpedo had been in use for decades and had already revolutionized naval warfare. What I failed to catch was just how off the second sentence was. I knew that the "eventually" was stretching it, but I didn't realize that it wasn't even directionally accurate.

Submarines were another line of technology that made revolutionary leaps due to advances in internal combustion and electricity. It turns out that there were a number of torpedo-firing subs being tested and even, to a limited extent, deployed by the time that Tesla demonstrated his torpedo. We can probably dismiss the first submarine to fire a torpedo while submerged (way back in 1886) as a failed experiment, but by the late 1890s, viable models were in the water, most notably the USS Holland which established most of the main features (albeit in a simplified form) of submarines until the advent of nuclear power. 

[In addition to torpedoes, the boat was armed with a pneumatic dynamite gun seen here.]

I realize I'm piling on, but there's a lot of wrong here, and seeing the facts so badly mangled in the New York Times, a publication that prides itself on fact checking, raises serious questions. I'd offer a couple of possible explanations. First, I suspect a great deal of the push for accuracy is driven by fear of how subjects might react. Writing about people long dead takes a certain amount of the pressure off.

Second, and I think more important, the lone, misunderstood visionary is a popular and reassuring conventional narrative. It tells a good story and it makes us feel superior to the people of Tesla's time (we, being sophisticated and having a deep understanding of technology, would have immediately seen the potential of these ideas). Lord Keynes famously said “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” The journalistic corollary of that is that standards are lower if you stick to conventional narratives and approved memes. Alessandra Stanley can prompt corrections that threaten to go on longer than the original articles. Maureen Dowd can babble incoherently about Washington dinner party gossip. David Brooks can simply make shit up. It's all okay because they are telling familiar stories that the establishment is comfortable with. The knives only come out for independent thought.

“One of the most powerful influences for broadening human intelligence… has spread an even, highly developed civilization through the land… has unified the Nation.”

From an AT&T advertisement that ran in Scientific American. June 19th, 1909.

Even allowing for the inevitable hyperbole of ad copy, this is big talk, but it is highly indicative of its era. There was a widespread, perhaps even dominant belief among turn-of-the-century Americans that the generation of unprecedented technological progress they had just witnessed marked the beginning of a new age of civilization and perhaps even human evolution.
This was about the time that the idea of and unimaginable future coming at us with ever-increasing speed first took hold in the public consciousness. It was also perhaps the last time events justified the notion.

"It’s not just the Second Avenue Subway"

Over at Citylab, Alon Levy has a great piece on the costs of passenger rail.

The approximate range of underground rail construction costs in continental Europe and Japan is between $100 million per mile, at the lowest end, and $1 billion at the highest. Most subway lines cluster in the range of $200 million to $500 million per mile; in Amsterdam, a six-mile subway line cost 3.1 billion Euros, or about $4 billion, after severe cost overruns, delays, and damage to nearby buildings. The Second Avenue Subway is unique even in the U.S. for its exceptionally high cost, but elsewhere, the picture is grim by European standards:

Line	Type	Cost	Length	Cost/mile
San Francisco Central Subway	Underground	$1.57 billion	1.7 miles	$920 million
Los Angeles Regional Connector	Underground	$1.75 billion	1.9 miles	$920 million
Los Angeles Purple Line Phases 1-2	Underground	$5.2 billion	6.5 miles	$800 million
BART to San Jose (proposed)	83% Underground	$4.7 billion	6 miles	$780 million
Seattle U-Link	Underground	$1.8 billion	3 miles	$600 million
Honolulu Area Rapid Transit	Elevated	$10 billion	20 miles	$500 million
Boston Green Line Extension	Trench	$2.3 billion	4.7 miles	$490 million
Washington Metro Silver Line Phase 2	Freeway median	$2.8 billion	11.5 miles	$240 million
Atlanta I-20 East Heavy Rail	Freeway median	$3.2 billion	19.2 miles	$170 million

It is hard to find exact international comparisons for subway lines running in the medians of freeways. However, it should not be much more difficult to construct such lines than to build light rail. Indeed, in the study for Atlanta’s I-20 East extension, there are options for light rail and bus rapid transit, and the light rail option is only slightly cheaper than the heavy rail option, at $140 million per mile.

Lists of light-rail lines built in France in recent years can be found on French Wikipedia and Yonah Freemark’s The Transport Politic, and in articles in French media. The cheaper lines cost about $40 million per mile, the more expensive ones about $100 million.
In the United States, most recent and in-progress light-rail lines cost more than $100 million per mile. Two light-rail extensions in Minneapolis, the Blue Line Extension and the Southwest LRT, cost $120 million and $130 million per mile, respectively. Dallas’ Orange Line light rail, 14 miles long, cost somewhere between $1.3 billion and $1.8 billion. Portland’s Orange Line cost about $200 million per mile. Houston’s Green and Purple Lines together cost $1.3 billion for about 10 miles of light rail.

This is almost beyond parody

This is Joseph

From Duncan Black, we have this article:

And today, a coalition of companies—including Lyft, Uber, and Zipcar—officially announced that they were signing on to a 10-point set of “shared mobility principles for livable cities”—in other words, industry goals for making city transit infrastructure as pleasant, equitable, and clean as possible. Some of the 10 statements, like “we support people over vehicles,” are vague but positive. But the final one speaks loudly about what city roads of the future could look like: “that autonomous vehicles (AVs) in dense urban areas should be operated only in shared fleets.”

It’s a “very convenient” idea for the companies who are promoting it, says Don MacKenzie, an assistant professor of civil and environmental engineering at the University of Washington. “It is basically [tying] the success of these companies to the adoption of autonomous vehicles,” he says. In other words, putting this principle in action means that “if people want the benefits of AVs, they can only get that by using shared fleets.” (Worth noting that the concept only applies to dense urban areas.)

Ok, the first thing here is that any possible argument for this approach for AVs is going to apply to public transit as well.  Bus service would be greatly improved if many or most cars were banned or restricted from operation on city streets.

Second, there is a huge implicit road subsidy here for these companies, presuming non-AVs would need to be banned as well.  Roads that can only be used by corporations (not individuals) that appear to be supported by public taxation.

Three, doesn't this create perverse incentives to make public transportation less effective, via lobbying for weaker bus service, especially if AVs become more standard?

Four, isn't regulation intended to give private benefit to a public good a problem?  Allowing an AV to only be operated by a collective seems to be an odd regulation.  In what other area do we restrict items to use by corporations but ban private use?  There must be some but . . . 

Five, doesn't this likely end up with more non-AVs on the road, making the AVs less safe because they can't communicate with non-AVs?

It seems like a very self-serving idea as a ride sharing fleet.  I am curious what benefits we have here that wouldn't apply to public transit?

I think Uber might be using the hover-plane design for its proposed flying taxis.

As we mentioned before, fairly early in the 20th century, popular culture seem to have settled on the period roughly around 1890 as the end of the simple, leisurely-paced good old days, just before technological revolution sent the country hurtling into the future.

Just Imagine is a good example if not a good film (to be perfectly honest, I've never made it all the way through without skipping sizable chunks). The period of comparison is pushed back to 1880 – – probably in order to have a nice round hundred years before the main action set in 1980 – – but the rest of the formula is there.

El (short for Elmer) Brendel was a popular Swedish dialect comedian who was popular at the time (though not popular enough for either of his starring vehicles to turn a profit). These days he is remembered almost solely for this film which itself is remembered mainly for providing stock footage for Saturday morning serials like Flash Gordon and Buck Rogers.

It's worth checking out the first few minutes just for the art direction and then fast forwarding to around the 22 minute mark where Henry Ford's anti-Semitism provides the subject for a then topical joke.

Media Post: Game of Thrones and succession

This is Joseph

** SPOILERS**

As some readers may know, the TV show game of thrones has bypassed the book series a song of ice and fire by George RR Martin.  In the process, they have also appeared to merge a number of characters together, to reduce complexity.  In the process, however, they have undermined a key piece of the entire story.

The plot that starts the whole series off is the discovery that the children of Cersei Lannister are not the real children of the king, Robert Baratheon.  As a result, they lack a blood claim to the iron throne.  In parallel, we have the story of Daenerys Targaryen who is seeking to reclaim the iron throne because she is a relative of the deposed king.  We also have a history of a rebellion where the king was overthrown and replaced by a relative (said Robert) who had a close blood claim on the throne.  Finally. there is a hidden twist where the bastard son of Ned Stark, Jon Snow, is actually the legitimate son of the Targaryen prince and has a stronger claim to the throne than Daenerys. 

So the whole plot is driven by blood claims and how they influence character's succession rights.  It is also a medieval world and not a modern one -- the king needs the support of the nobles in order to raises armies and funds.  These nobles, themselves, depend on succession for legitimacy. 

In the last season there were some questionable succession moves.  But for some of them I can justify how the claim comes into being.  Cersei Lannister is a close relative (mother) of the last king and happens to be in charge of the regency at the time.  It's not typical, but it happened with Catherine the Great (for example) where a marriage/parentage claim allowed an unexpected monarch.  Same with the Queen of Thorns -- she is at least a close relative of the last head of house Tyrell.  An odd succession choice but you can see how she could have been a compromise candidate. 

But what is going on with Ellaria Sand?  She leads a coup to kill the members of the ruling family of Dorne.  She is the illegitimate girlfriend of the brother of the previous ruler.  How does she end up in charge?  Now I could imagine a sand snake in charge -- they are also illegitimate but are at least the daughters of Oberyn Martell.  But Ellaria?

Ellaria then joins forces with Daenerys, whose only legitimate claim on the iron throne rests on blood succession.  If you take that away then you have a foreign invader pursuing a grudge against the family of people who wronged her (it is obvious that Cersei, herself, had nothing to do with Robert's Rebellion and the major rebels are all dead). 

Why would Daenerys undermine the major point in her favor (succession law) by allying with somebody who has no succession rights to her current position (inside her kingdom) and, at the very least, was suspiciously involved with the violent death of the previous ruler and heir.  I mean both were cut down along with their bodyguard -- nobody is dumb enough to think that this is an accident. 

What I think happened was that they merged Arianne Martel with Ellaria.  If Arianne did this plot then that would be different.  Without clear evidence that she was the murderer then she has the best claim to the throne (being the current heir).  Ambiguity might preserve her position (think of Edward II and Edward III) and objectors would have to act fast to gather evidence.  Nobles wouldn't see their succession rights being tainted. 

But this adaption definitely requires some more thought and should have been staged better.  Why not put Obara Sand in charge, as the closet blood relative to the now extinct house of Martell?  It might not be extinct in the books, but at least in the show that would be an easy claim to make as they killed every Martell we met.   As it is, without additional information, the succession of Ellaria Sand to the leadership of Dorne undermines the main force driving the political plot and reduces the coherence of the story.

This was not one of the changes that improved the show.   

Alon vs. Elon

Alon Levy is a highly respect transportation blogger currently based in Paris. He's also perhaps the leading debunker of the Hyperloop (or more accurately, the “Hyperloop,” but that's a topic we've probably exhausted). When Brad Plumer writing in the Washington Post declared ‘There is no redeeming feature of the Hyperloop.’, the headline was a quote from Levy.

Recently, Levy took a close look at Musk's Boring Company and found the name remarkably apt. We'd previously expressed skepticism about Musk's claim, but it turns out we were being way too kind.

Levy's takedown is detailed but readable and I highly recommend going through it if you have any interest in what drives infrastructure costs. Rather than try to excerpt some of the more technical passages, I thought I'd stick with the following general but still sharp observation from the post.

Americans hate being behind. The form of right-wing populism that succeeded in the United States made that explicit: Make America Great Again. Culturally, this exists outside populism as well, for example in Gordon Gekko’s greed is good speech, which begins, “America has become a second-rate power.” In the late 2000s, Americans interested in transportation had to embarrassingly admit that public transit was better in Europe and East Asia, especially in its sexiest form, the high-speed trains. Musk came in and offered something Americans craved: an American way to do better, without having to learn anything about what the Europeans and Asians do. Musk himself is from South Africa, but Americans have always been more tolerant of long-settled immigrants than of foreigners.

In the era of Trump, this kind of nationalism is often characterized as the domain of the uneducated: Trump did the best among non-college-educated whites, and cut into Democratic margins with low-income whites (regardless of education). But software engineers making $120,000 a year in San Francisco or Boston are no less nationalistic – their nationalism just takes a less vulgar form. Among the tech workers themselves, technical discussions are possible; some close-mindedly respond to every criticism with “they also laughed at SpaceX,” others try to engage (e.g. Hyperloop One). But in the tech press, the response is uniformly sycophantic: Musk is a genius, offering salvation to the monolingual American, steeped in the cultural idea of the outside inventor who doesn’t need to know anything about existing technology and can substitute personal intelligence and bravery.

In reality, The Boring Company offers nothing of this sort. It is in the awkward position of being both wrong and unoriginal: unoriginal because its mission of reducing construction costs from American levels has already been achieved, and wrong because its own ideas of how to do so range from trivial to counterproductive. It has good marketing, buoyed by the tech world’s desire to believe that its internal methods and culture can solve every problem, but it has no product to speak of. What it’s selling is not just wrong, but boringly so, without any potential for salvaging its ideas for something more useful.