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]]> A Rationale http://www.brentwheeler.com/index.php?itemid=223 Mon, 30 Jan 2012 16:18:00 +1300 http://www.brentwheeler.com/index.php?itemid=942
Published: January 26, 2012

In business as in jazz, the tension between training and improvisation can result in great new works, says John Kao, the innovation adviser (and pianist).

That’s the message that John Kao, an innovation adviser to corporations and governments — who is also a jazz pianist — was to deliver in a performance and talk on Saturday at the World Economic Forum in Davos, Switzerland. Jazz, Mr. Kao says, demonstrates some of the tensions in innovation, between training and discipline on one side and improvised creativity on the other.
In business, as in jazz, the interaction of those two sides, the yin and the yang of innovation, fuels new ideas and products. The mixture varies by company.

Mr. Kao points to the very different models of innovation represented by Google and Apple, two powerhouses of Silicon Valley, the world’s epicenter of corporate creativity.

The Google model relies on rapid experimentation and data. The company constantly refines its search, advertising marketplace, e-mail and other services, depending on how people use its online offerings. It takes a bottom-up approach: customers are participants, essentially becoming partners in product design.

The Apple model is more edited, intuitive and top-down. When asked what market research went into the company’s elegant product designs, Steve Jobs had a standard answer: none. “It’s not the consumers’ job to know what they want,” he would add.

The Google-Apple comparison, Mr. Kao says, highlights the “archetypical tension in the creative process.”

Google speaks to the power of data-driven decision-making, and of online experimentation and networked communication. The same Internet-era tools enable crowd-sourced collaboration as well as the rapid testing of product ideas — the essence of the lean start-up method so popular in Silicon Valley and elsewhere.

“These are business and management innovations lubricated by technology,” says Thomas R. Eisenmann, a professor at the Harvard Business School.
The benefits, experts say, are most apparent in markets like Internet software, online commerce and mobile applications for smartphones and tablets. “The cost of creation, distribution and failure is low, so it takes relatively little time, money and effort to float trial balloons,” says Randy Komisar, a partner in Kleiner Perkins Caufield & Byers, the venture capital firm, and a lecturer on entrepreneurship at Stanford.

That style of innovation is being applied well beyond Google’s products and Internet start-ups. The National Science Foundation, for example, is embracing the formula to try to increase commercialization of the university research it finances. Last fall, the foundation announced the first of a series of grants for what it calls the N.S.F. Innovation Corps. The 21 three-member teams received a crash course at Stanford in lean start-up techniques, and have been given $50,000 each and six months to test whether their inventions are marketable.

The lean formula, with its emphasis on constantly testing ideas and products with customers, amounts to applying “the scientific method to market-opportunity identification,” says Errol B. Arkilic, program director at the foundation.

Yet while networked communications and marketplace experiments add useful information, breakthrough ideas still come from individuals, not committees. “There is nothing democratic about innovation,” says Paul Saffo, a veteran technology forecaster in Silicon Valley. “It is always an elite activity, whether by a recognized or unrecognized elite.”

Successful innovation, Mr. Saffo observes, requires “an odd blend of certainty and openness to new information.” In other words, it is a blend of top-down and bottom-up discovery.

OPEN innovation isn’t a new idea. It flourished, in its way, even in the late 19th and early 20th centuries, notes Tom Nicholas, a historian at the Harvard Business School. In fields like electricity, pharmaceuticals and communications, big corporations including General Electric and Dow Chemical routinely monitored the research beyond their walls, and bought or licensed promising work, especially the inventions of university scientists. The result, Mr. Nicholas says, was a thriving “ecosystem of private and corporate innovation.”

A century later, the corporate labs at G.E. are trying to quicken the pace of innovation — but this is long-cycle innovation, since G.E.’s power generators, jet engines and medical-imaging equipment last for decades. The company is opening a software center in Northern California to make its machines more intelligent with data-gathering sensors, wireless communications and predictive algorithms. The goal is to develop machines, such as jet engines or power turbines, that can alert their human minders when they need repairs, before equipment failures occur. Such smarter machines, the company says, are early arrivals in what it calls the Industrial Internet.

To tap outsider ideas, G.E.’s research arm has made investments with venture capital funds in clean-energy technology and health care, and it works with corporations, government labs and universities on hundreds of collaborative projects. “We’re much more externally focused and connected to the outside world than we were several years ago,” says Michael Idelchik, G.E.’s vice president of advanced technologies.

Apple’s smartphones, tablets and computers typically have life spans measured in a few years instead of decades, with new models introduced regularly. But like G.E., Apple is in the hardware business, where innovation cycles are beholden to the limits of materials science and manufacturing.

Apple’s physical world is far different from Google’s realm of Internet software, where writing a few lines of new code can change a product instantly. The careful melding of hardware with software in Apple’s popular products is a challenge in multidisciplinary systems design that must be orchestrated by a guiding hand — though it will no longer be the hand of Mr. Jobs, who died last October.

Yet Apple has also repeatedly displayed its openness to new ideas and influences, as exemplified by the visit that Mr. Jobs made to the Palo Alto research center of Xerox in 1979. He saw an experimental computer with a point-and-click mouse and graphical on-screen icons, which he adopted at Apple. It later became the standard for the personal computer industry.

In 2010, Apple bought Siri, a personal assistant application for smartphones. At the time, it was a small start-up in Silicon Valley that originated as a program funded by the Defense Advanced Research Projects Agency of the Pentagon. Last year, Siri became the talking question-answering application on iPhones.

Apple product designs may not be determined by traditional market research, focus groups or online experiments. But its top leaders, recruited by Mr. Jobs, are tireless seekers in an information-gathering network on subjects ranging from microchip technology to popular culture. “It’s a lot of data crunched in a nonlinear way in the right brain,” says Erik Brynjolfsson, director of the M.I.T. Center for Digital Business.

Apple and Google pursue very different paths to innovation, but the gap between their two models may be closing a bit. In the months after Larry Page, the Google co-founder, took over as chief executive last April, the company eliminated a diverse collection of more than two dozen projects, a nudge toward top-down leadership. And Timothy D. Cook, Apple’s C.E.O., will almost surely be a more bottom-up leader than Mr. Jobs.
“What we’re likely to see,” Mr. Kao says, “is Google and Apple each borrowing from the playbook of the other.”
]]> Innovation http://www.brentwheeler.com/index.php?itemid=942 Mon, 30 Jan 2012 16:17:56 +1300 http://www.brentwheeler.com/index.php?itemid=941
At a conference in Philadelphia earlier this month, a Wharton professor noted that one of the country's biggest economic problems is a tsunami of misinformation. You can't have a rational debate when facts are so easily supplanted by overreaching statements, broad generalizations, and misconceptions. And if you can't have a rational debate, how does anything important get done?

As author William Feather once advised, "Beware of the person who can't be bothered by details." There seems to be no shortage of those people lately.

Here are three misconceptions that need to be put to rest.
Misconception 1)

Most of what Americans spend their money on is made in China.

Fact: Just 2.7% of personal consumption expenditures go to Chinese-made goods and services. 88.5% of U.S. consumer spending is on American-made goods and services.

I used that statistic in an article last week, and the response from readers was overwhelming: Hogwash. People just didn't believe it.

The figure comes from a Federal Reserve report. You can read it here.

A common rebuttal I got was, "How can it only be 2.7% when almost everything in Wal-Mart (NYSE: WMT ) is made in China?" Because Wal-Mart's $260 billion in U.S. revenue isn't exactly reflective of America's $14.5 trillion economy. Wal-Mart might sell a broad range of knickknacks, many of which are made in China, but the vast majority of what Americans spend their money on is not knickknacks.

The Bureau of Labor Statistics closely tracks how an average American spends their money in an annual report called the Consumer Expenditure Survey. In 2010, the average American spent 34% of their income on housing, 13% on food, 11% on insurance and pensions, 7% on health care, and 2% on education. Those categories alone make up nearly 70% of total spending, and are comprised almost entirely of American-made goods and services (only 7% of food is imported, according to the USDA).

Even when looking at physical goods alone, Chinese imports still account for just a small fraction of U.S. spending. Just 6.4% of nondurable goods -- things like food, clothing and toys -- purchased in the U.S. are made in China; 76.2% are made in America. For durable goods -- things like cars and furniture -- 12% are made in China; 66.6% are made in America.

Another way to grasp the value of Chinese-made goods is to look at imports. The U.S. is on track to import $340 billion worth of goods from China this year, which is 2.3% of our $14.5 trillion economy. Is that a lot? Yes. Is it most of what we spend our money on? Not by a long shot.

Part of the misconception is likely driven by the notion that America's manufacturing base has been in steep decline. The truth, surprising to many, is that real manufacturing output today is near an all-time high. What's dropped precipitously in recent decades is manufacturing employment. Technology and automation has allowed American manufacturers to build more stuff with far fewer workers than in the past. One good example: In 1950, a U.S. Steel (NYSE: X ) plant in Gary, Ind., produced 6 million tons of steel with 30,000 workers. Today, it produces 7.5 million tons with 5,000 workers. Output has gone up; employment has dropped like a rock.

Misconception 2):

We owe most of our debt to China.

Fact: China owns 7.8% of U.S. government debt outstanding.

As of August, China owned $1.14 trillion of Treasuries. Government debt stood at $14.6 trillion that month. That's 7.8%.

Who owns the rest? The largest holder of U.S. debt is the federal government itself. Various government trust funds like the Social Security trust fund own about $4.4 trillion worth of Treasury securities. The Federal Reserve owns another $1.6 trillion. Both are unique owners: Interest paid on debt held by federal trust funds is used to cover a portion of federal spending, and the vast majority of interest earned by the Federal Reserve is remitted back to the U.S. Treasury.

The rest of our debt is owned by state and local governments ($700 billion), private domestic investors ($3.1 trillion), and other non-Chinese foreign investors ($3.5 trillion).

Does China own a lot of our debt? Yes, but it's a qualified yes. Of all Treasury debt held by foreigners, China is indeed the largest owner ($1.14 trillion), followed by Japan ($937 billion) and the U.K. ($397 billion).

Right there, you can see that Japan and the U.K. combined own more U.S. debt than China. Now, how many times have you heard someone say that we borrow an inordinate amount of money from Japan and the U.K.? I never have. But how often do you hear some version of the "China is our banker" line? Too often, I'd say.

Misconception 3):

We get most of our oil from the Middle East.

Fact: Just 9.2% of oil consumed in the U.S. comes from the Middle East.

According the U.S. Energy Information Administration, the U.S. consumes 19.2 million barrels of petroleum products per day. Of that amount, a net 49% is produced domestically. The rest is imported.

Where is it imported from?

Only a small fraction comes from the Middle East, and that fraction has been declining in recent years. So far this year, imports from the Persian Gulf region -- which includes Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates -- have made up 9.2% of total petroleum supplied to the U.S. In 2001, that number was 14.1%.

The U.S. imports more than twice as much petroleum from Canada and Mexico than it does from the Middle East. Add in the share produced domestically, and the majority of petroleum consumed in the U.S. comes from North America.

This isn't to belittle our energy situation. The nation still relies on imports for about half of its oil. That's bad. But should the Middle East get the attention it does when we talk about oil reliance? In terms of security and geopolitical stability, perhaps. In terms of volume, probably not.

A roomful of skeptics

"People will generally accept facts as truth only if the facts agree with what they already believe," said Andy Rooney. Do these numbers fit with what you already believed? No hard feelings if they don't.

HT to Sid Raisch and Alan Dormer for this link — Morgan Housel, October 25, 2011 ]]> Everyday Economics http://www.brentwheeler.com/index.php?itemid=941 Thu, 26 Jan 2012 09:57:58 +1300 http://www.brentwheeler.com/index.php?itemid=940
The various attacks on Mitt Romney in the U.S. for his spectacularly successful private equity business ventures provide a cogent example and below Holman Jenkins provides a well reasoned update of the "creative destruction" process first highlighted by economist Joseph Schumpeter.

The Truth About Bain and Jobs (ex WSJ thanks to D. Haarmeyer for the pointer)

Job creation and destruction are both relentless. The small difference between the two is what we call prosperity.
By HOLMAN W. JENKINS, JR.

Mitt Romney and his GOP rivals are engaged in a fruitless argument in South Carolina over whether private equity creates more jobs than it destroys. The debate is fruitless because voters and politicians don't believe jobs should ever be destroyed.

The American voter is not about to become sophisticated about the place of private equity in American life. But the American voter can become inured to it. So let backers of Newt Gingrich's flaming candidacy run a "King of Bain" video savaging Mr. Romney's leveraged buyout career on South Carolina TV.
All such productions are but poor reprises of a story that appeared in this paper on May 16, 1990, written by a reporter named Susan Faludi, later to become famous as an angry feminist author.

In 7,770 words, Ms. Faludi described...the buyout of the Safeway supermarket chain, and if anybody suffered a layoff or pay cut or got depressed and committed suicide, she did not hesitate to blame private equity. You would think that firing had been unknown in the economy until private equity invented it.

Thomas S. Monaghan, founder of Domino's Pizza, Inc., left, and Mitt Romney, then-managing director of Bain Capital, sign an agreement in Sept. 1998.
Most damning, she claimed Safeway was a profitable company when private equity went to work trying to make it more profitable. What neither she nor Safeway's investors could have known was that the fat in the supermarket industry would soon be the target of Wal-Mart, Costco and other revolutionary discounters, so competitive change was coming in any case. The lesson? When private-equity investors sniff a profit opportunity, they are probably just one step ahead of someone else.

As a rule, private equity takes on the most troubled companies because turning them around offers the biggest profit opportunities. That's why private equity tends to generate more than its share of traumatic headlines. Look no further than Ripplewood Holdings' decision to put the maker of Twinkies into bankruptcy this week. It's the kind of decision that, were Ripplewood's principals ever to run for office, would get them savaged in an ad.

But guess what? Ripplewood also bought the company, Hostess Brands, out of bankruptcy three years ago, when it was called Interstate Bakeries. Ripplewood is just the latest manager to wrestle unsuccessfully with the company's fundamental problem, a unionized workforce in an industry where competitors aren't unionized.

Next time you're choosing a fattening indulgence in the checkout line, ask yourself if you're willing to pay extra so Twinkies and Wonder Bread (made by the same company) can arrive at the store on different trucks? So the driver can be excused from helping to unload? So the company can pay workers-comp costs way out of line the industry's? So a company with just 19,000 employees can administer 40 different pension plans?
We didn't think so.

But the best antidote to foolish thinking about job creation is the work of economists Steven J. Davis and John Haltiwanger. Their painstaking research has revealed a side of America's dynamism that isn't always pretty. Between 1977 and 2005, years roughly overlapping Mr. Romney's business career, some 15% of all jobs were destroyed every year, even as total jobs grew by an average of 2% a year. Job creation and destruction are both relentless, the authors showed in paper after paper. The small difference between the two is what we call prosperity.

But now Republicans are worried. To fault Mr. Romney for being involved with businesses that both grew and shrank, that created jobs and destroyed them, may be to fault him for having eaten from the tree of knowledge in a way that, say, President Obama has not. But how will his story fare in November against Mr. Obama's simpler story, in which ravenous capitalists destroy jobs and government creates them with things like the Detroit/UAW bailout, solar subsidies and health-care mandates?

Mr. Romney would be a fool to believe a political campaign is the right place to explain the private-equity business. But he has a perfectly defensible story to tell.

First, the money: He expected to be paid well. But nobody—not even those whose billions earned in private equity make Mr. Romney's millions look paltry—envisioned the astounding rise in business values in the gilded '80s and '90s. When Mr. Romney was asked by his boss to start Bain Capital in 1983, the Dow was at 1086.50. When he left on Feb. 11, 1999 to run the Olympics, it was 9363.46. His is not the only recent fortune owed partly to this accident of timing (Warren Buffett's and many others come to mind).

Indeed, if we're being honest, Mitt here is representative of a generation of professionals whose serendipity it was to have spent the 1970s on our education and then to be spit into the job market just as one of history's great economic liftoffs was taking place.

Second, the work: He put his talent for calm, careful analysis to work helping American businesses adapt to the onrushing challenges of globalization and technological change. Looking back, it may even be true that his ratio of jobs created to jobs destroyed was better than the economy's as a whole.
What does this have to do with the presidency? Perhaps not much, but one thing he didn't learn at Bain Capital was to twiddle his thumbs because taking action might make somebody mad at him.

That's not the worst qualification to bring to the Oval Office right now.

]]> Everyday Economics http://www.brentwheeler.com/index.php?itemid=940 Tue, 17 Jan 2012 09:35:27 +1300 http://www.brentwheeler.com/index.php?itemid=937
WSJ THE WEEKEND INTERVIEW
JANUARY 7, 2012 HT D. Haarmeyer


By COLLIN LEVY
The Republican presidential campaign is at full boil, and among the biggest players are so-called super PACs, political-action committees that can raise and spend as much money as they like. Mitt Romney's version helped ruin Newt Gingrich in Iowa, for example. For that right to free speech (not the ads), you can thank or blame Chip Mellor, who runs the most influential legal shop that most people have never heard of.
Mr. Mellor is the 61-year-old chief of the Institute for Justice, which has been celebrating its 20th anniversary of guerrilla legal warfare on behalf of individual freedom. He's worth getting to know because he and his fellow legal battlers are behind a larger campaign to restore some of the Constitution's lost rights. And they're often succeeding.
Take political speech. The Supreme Court's January 2010 ruling in Citizens United v. FEC restored the First Amendment rights of corporations and unions to assemble to influence elections. That was followed in March 2010 by SpeechNow v. FEC, in which the D.C. Circuit Court of Appeals said that political committees may accept unlimited contributions for the purpose of independent political spending.

"That's not to downplay the importance of Citizens United," Mr. Mellor says, "but SpeechNow is the decision that lets people (and corporations and unions) pool their money in Super PACs." Mr. Mellor's outfit represented SpeechNow with the Center for Competitive Politics and IJ argued the case before the court.

The campaign finance reform lobby is going to fight relentlessly, Mr. Mellor says. "There continues to be the false premise that the problem in politics is too much money, when in fact the problem is too much government for sale." Besides, he points out, "these campaign finance laws are really treating only a symptom, not the disease. Until you get to the root cause, which is too much government, you are really not doing anything productive and in many cases you are doing harm."

Sitting in the IJ's brightly colored office in Northern Virginia, Mr. Mellor recalls the satisfactions and challenges since he founded the institute with Clint Bolick in 1991. The best part, Mr. Mellor says, "is that we find these people around the country who are already standing up for the principles we want to help vindicate. They say: All I want to do is earn an honest living, get a good education for my kids, own my home or business [or] speak in a political campaign without being subject to restraints."

In many of its cases, IJ will lose at the trial court and then win on appeal. That was the story in the group's latest foray into medicine, in which it represents cancer patients in their fight for access to bone-marrow donations that can save their lives. Under the 1984 National Organ Donor Transplant Act, Congress made it a felony for anyone to give or receive compensation for donating an organ, sweeping bone marrow into the net along with organs like kidneys and lungs.

IJ filed suit against the U.S. attorney general to challenge the law and saw the case dismissed in the trial court. When the case got to the Ninth Circuit Court of Appeals, however, the judges reversed unanimously, in effect ruling that most bone-marrow donations can be treated like blood donations, making a pilot compensation program legal and handing IJ's clients a major victory.

"Blood can be sold, sperm can be sold, ova can be sold" so this shouldn't be any different, Mr. Mellor explains. Providing a modest stipend for those who donate to the National Bone Marrow Registry could exponentially improve the chances of terminally ill patients finding a donor that could save their life.

As with many of IJ's economic-liberties cases, Mr. Mellor explains, the point is to undo the damage done by courts acting as a rubber stamp for whatever the Congress and executive branch do. "Judicial activism is an empty pejorative invoked by both liberals and conservatives to criticize outcomes they don't like," he says. The more appropriate role of the courts is judicial engagement. "They would start with a presumption of liberty and strike down those laws that exceed constitutional power delegated to the other branches."

The institute's cases often deal with the burdens of government regulation on the common man and in doing so bring national attention to the core principles of constitutional government. Listen to the GOP presidential debates and "economic freedom" is an idea every candidate invokes to appeal to a sizeable segment of American voters alarmed by the big-government encroachments of the Obama administration.

It wasn't always thus. "I think it's not being immodest to say that when we started the Institute for Justice in 1991, the term [economic liberty] was confined pretty much to libertarian academics," Mr. Mellor grins. "Today even [Supreme Court Justice] Stephen Breyer talks about it, if only to disparage it."

Ironically, the institute's most visible case, 2005's Kelo v. New London, was a loss. Susette Kelo and other homeowners in New London, Conn., had resisted the use of the government's eminent domain powers to take their homes and give the property to a development corporation for condos and other private development adjacent to a new Pfizer plant. The Supreme Court found against them.

But in the national backlash against the decision, they arguably won the war. Since Kelo, 44 states have strengthened their laws protecting property rights from eminent domain and Kelo has become shorthand for insensitive, overreaching government not respecting the rights of ordinary people.
Mr. Mellor is an optimist about the outcome of future private property cases before the Supreme Court. Justice Antonin Scalia, he notes, "just recently said that there have been three cases that have been wrongly decided by the Supreme Court, and that two of them have been undone and one of them soon will be. He cited Dred Scott, Plessy, and Kelo."

The institute's first client was not famous at all but what Mr. Mellor calls a "paradigmatic" one who framed an injustice with crystal clarity. IJ represented Taalib-Din Uqdah, who wanted to make his living braiding hair in Washington, D.C. But he couldn't do that without becoming a licensed cosmetologist, a requirement that would have cost him thousands of dollars. IJ got the city council to back down and allow Mr. Uqdah and his wife to get back in business without the onerous regulation.

"The constitutional principle was very, very important, it went far beyond hair braiding," Mr. Mellor says. "So it really was a perfect platform to start awakening people to what's at stake and what the solutions are."

In the years since, IJ has taken on regulations that suffocate entrepreneurs from ferry operators, taxi drivers and stadium vendors to food-truck operators, tour guides and interior designers. Behind each is a small business owner suffering under government regulations that, in most cases, aren't about protecting the public or some general interest—but about awarding anticompetitive privileges to an influential company or interest group.

If entrepreneurs are often the good guys, at the top of IJ's hit list are corporations looking for government favors and handouts. "We do recognize that there is a profound difference between being pro-free enterprise and being pro-business," Mr. Mellor notes. "When it comes to businesses, Adam Smith recognized that it will only be a matter of time before business interests get together and try to monopolize to achieve some kind of control over the market. But without government, they can't do that for any length of time."

Mr. Mellor traces his political evolution back to his days as a student protester at Ohio State University in the late 1960s. This was the time of the Vietnam War and Mr. Mellor, while marching against it, had the "epiphany of my life," he says. "It became undeniably obvious to me that both the left, which I was a part of, and the right were really after the same thing, which was power. And I didn't want any part of that."

So began an intellectual odyssey that took him from Whittaker Chambers to Ayn Rand and Friedrich Hayek and led to law school at the University of Denver. He went into private practice "in hopes that I could be an independent Clarence Darrow type," but he "quickly became disabused of the notion that you could ever control your own schedule," let alone do it all pro-bono. He went the public interest route and met legal eagle and school-choice specialist Clint Bolick in 1982, founding IJ in 1991.

The language of student protest became a key part of the IJ way. The group—it consists of some 33 lawyers and 65 staffers—is fighting not just to overturn precedents and restore constitutional jurisprudence, but to frame the debate in a way that educates and embeds those ideas in the national consciousness.

"We learned our lesson from the NAACP," Mr. Mellor continues. "Back in 1934 if you look at their annual report, there is a paragraph to the effect that the goal of the campaign must be to affect broad public opinion as well as [to win] individual cases. So every case we take is an educational vehicle designed to manifest the constitutional principles and how they apply to countless other people around the country."

Public interest law is traditionally practiced by liberal groups like the ACLU and the NAACP. Adapting the model to the kind of libertarian goals espoused by IJ has a unique set of challenges. The left fights to pass laws and create new bureaucracies to enforce them, which in turn fosters a permanent interest group to defend the left's gains.

"Groups on the left can fight for their goals through statutory law, and then count on an army of other activist groups to continue to build on their work . . . The left has tremendous advantage," Mr. Mellor explains.

In a broader legal context, Mr. Mellor notes, restoring the Privileges or Immunities Clause, a portion of the 14th Amendment which was intended to protect the economic freedom of freed slaves and other Americans, is at the core of IJs mission when it comes to economic liberty. When the Supreme Court dismantled its protections in what were known as the "Slaughter House cases" in 1873, he says, it began "the whole progressive era of economic regulation and property regulation." If you have a recognition of enumerated powers, "the potential for expansive mischief or creating new rights out of whole cloth is limited if not nonexistent," he says.

"The Supreme Court is really the culprit in creating a lot of the problems we have today," he adds. "They gutted provisions of the Constitution that were intended to constrain government or transformed them, like the Commerce Clause, into an affirmative grant of power."

If the Supreme Court is the problem, then it is also eventually the solution, and Mr. Mellor sees promise in today's court. Justice Clarence Thomas, he says, has "developed a very coherent and consistent constitutional philosophy," Chief Justice John Roberts has "said some amazingly powerful things in the campaign finance cases." And "Justice Kennedy has also evidenced some libertarian streaks over time."

As for IJ, he says, don't worry about them becoming victims of their own success. "We're not going to run out of arrogant and avaricious officials out there." he smiles. "We're going to have lots to do for a long time."

Ms. Levy is a senior editorial writer at the Journal, based in Washington.

]]> Law and Economics http://www.brentwheeler.com/index.php?itemid=937 Thu, 12 Jan 2012 23:59:20 +1300 http://www.brentwheeler.com/index.php?itemid=936
Alex Tarbarrok is the expert on this and his dirt cheap $2.99 e-book provides a sharp, economical explanation replete with numerous examples of why the patent system is stunting not encouraging innovation.

This diagram gives some idea of the size of the problem.....
Inhibiting innovation]]> Innovation http://www.brentwheeler.com/index.php?itemid=936 Sat, 7 Jan 2012 11:59:38 +1300 http://www.brentwheeler.com/index.php?itemid=932
Summary of principles of governance:..........Principles of Governance
Risk management for Boards of Directors:... Risk Management for Boards

Browser back button to return to site.]]> Governance http://www.brentwheeler.com/index.php?itemid=932 Fri, 30 Dec 2011 10:19:54 +1300 http://www.brentwheeler.com/index.php?itemid=928 Nils-Axel Mörner
3 December 2011

It has now become traditional for climate change summits to open with a new, dazzling prediction of impending catastrophe. The UN Climate Conference under way in the South African coastal town of Durban is no exception. This year’s focus is on a familiar and certainly arresting argument: that sea levels are rising at a catastrophic and unprecedented rate mainly due to man-made global warming.

No one makes this point with quite so much panache as Mohamed Nasheed, president of the Maldives. In the run-up to the summit, he declared that he leads ‘an island nation that may slip beneath the waves if all this talk on climate does not lead to action soon’.

Since chairing a meeting of his Cabinet underwater, Nasheed has been busy rallying other low-lying countries to make similar points. He chaired a summit of them in Bangladesh, to compare notes ahead of the Durban summit, and they agree to limit their own carbon emissions. Ban Ki-moon, the head of the United Nations, was delighted — saying that it was unfair to ask ‘the poorest and most vulnerable to bear the brunt of the impact of climate change alone’ and called for them to be given subsidies by richer countries to adapt. Such funds do not seem to be forthcoming. It seems the summit in Durban will, like so many climate summits, be disappointing.

I may be able to help. As someone with some expertise in the field, I can assure the low-lying countries that this is a false alarm. The sea is not rising precipitously. I have studied many of the low-lying regions in my 45-year career recording and interpreting sea level data. I have conducted six field trips to the Maldives; I have been to Bangladesh, whose environment minister was claiming that flooding due to climate change threatened to create in her country 20 million ‘ecological refugees’. I have carefully examined the data of ‘drowning’ Tuvalu. And I can report that, while such regions do have problems, they need not fear rising sea levels.

My latest project was a field expedition to India, to the coast of Goa, combining observations with archeological information. Our findings are straightforward: there is no ongoing sea level rise. The sea level there has been stable for the last 50 years or so, after falling some 20cm in around 1960; it was well below the present level in the 18th century and some 50 to 60cm above the present in the 17th century. So it is clear that sea levels rise and fall entirely independently of so-called ‘climate change’.

Explaining this to the public can be very hard. There are so many misconceptions about sea levels, not least that they are constant throughout the world. In fact, there are big variations — by as much as two metres. You need to think not of a constant, level surface, but of an agitated bath where the water is slopping back and forth. This is a dynamic process. In 900 ad, for example, the high level was in Tanzania and the low was in Peru; a century later this had reversed. It is also often forgotten that while sea levels may rise and fall (‘eustasy’), so too may the land mass itself (‘isostasy’).

Today, all people talk about is the sea level — because it coincides with the IPCC’s (Intergovernmental Panel on Climate Change) narrative about melting icesheets, diminishing glaciers and man-made global warming. This leads to confusion over cases such as Bangladesh, whose plight is the exact opposite of the one claimed by environmental lobbyists and the IPCC.

Bangladesh is cursed because of rain over the Himalayas. This has nothing to do with the sea. It is also cursed because of the cyclones which push water inland. Again, this has nothing to do with the sea. Bangladesh is cursed because about half of its land mass lies less than eight metres above sea level — making it highly vulnerable to coastal flooding. But this has always been the fate of delta regions: it has little if anything to do with ‘climate change’.

Two years ago, I visited the Sundarban delta area in Bangladesh and was able to observe clear evidence of coastal erosion, but no rise in sea level. In fact it has been stable there for 40 to 50 years. One way to tell this is by examining the mangrove trees, whose horizontal root systems now hang some 80cm above the mudflats as a result of erosion.

But the IPCC’s Fourth Assessment Report (2007) tells a different story about sea levels worldwide and is worth quoting in some detail: ‘Even under the most conservative scenario, sea level will be about 40cm higher than today by the end of 21st century and this is projected to increase the annual number of people flooded in coastal populations from 13 million to 94 million. Almost 60 per cent of this increase will occur in South Asia.’

This is nonsense. The world’s true experts on sea level are to be found at the INQUA (International Union for Quaternary Reseach) commission on Sea Level Changes and Coastal Evolution (of which I am a former president), not at the IPCC. Our research is what the climate lobby might call an ‘inconvenient truth’: it shows that sea levels have been oscillating close to the present level for the last three centuries. This is not due to melting glaciers: sea levels are affected by a great many factors, such as the speed at which the earth rotates. They rose in the order of 10 to 11cm between 1850 and 1940, stopped rising or maybe even fell a little until 1970, and have remained roughly flat ever since.

So any of the trouble attributed to ‘rising sea levels’ must instead be the result of other, local factors and basic misinterpretation. In Bangladesh, for example, increased salinity in the rivers (which has affected drinking water) has in fact been caused by dams in the Ganges, which have decreased the outflow of fresh water.

Even more damaging has been the chopping down of mangrove trees to clear space for shrimp farms. In one area, 19 square miles of mangrove vegetation in 1988 had by 2005 decreased to barely half a square mile. Mangrove forests offer excellent protection against the damage of cyclones and storms, so inevitably their systematic destruction has drastically increased local vulnerability to these problems.

At Tuvalu in the Pacific, I found no evidence of flooding — despite claims in Al Gore’s An Inconvenient Truth that it was one of those ‘low-lying Pacific nations’ whose residents have had to ‘evacuate their homes because of rising seas’. In fact the tide gauge of the past 25 years clearly shows there has been no rise.

But the best-known ‘victim’ of rising sea levels is, without doubt, the Maldives. This myth has been boosted by the opportunism of Mohamed Nasheed, who stars in a new documentary called The Island President. The film’s tagline is ‘To save his country, he has to save our planet’. It is a depressing example of how Hollywood-style melodrama has corrupted climate science. Nasheed has been rehearsing his lines since being elected in 2009. ‘We are drowning, our nation will disappear, we have to relocate the people,’ he repeatedly claims.

If this is what President Nasheed believes, it seems strange that he has authorised the building of many large waterside hotels and 11 new airports. Or could it perhaps be that he wants to take a cut of the $30 billion fund agreed at an accord in Copenhagen for the poorest nations hit by ‘global warming’? Within two weeks of Copenhagen, the Maldives foreign minister Ahmed Shaheed wrote to the US secretary of state Hillary Clinton to express support for the accord.

The IPCC’s Fourth Assessment claimed that ‘there is strong evidence’ of sea level rising over the last few decades. It goes as far as to claim: ‘Satellite observations available since the early 1990s provide more accurate sea level data with nearly global coverage. This decade-long satellite altimetry data set shows that since 1993, sea level has been rising at a rate of around 3mm yr–1, significantly higher than the average during the previous half century. Coastal tide gauge measurements confirm this observation, and indicate that similar rates have occurred in some earlier decades.’

Almost every word of this is untrue. Satellite altimetry is a wonderful and vital new technique that offers the reconstruction of sea level changes all over the ocean surface. But it has been hijacked and distorted by the IPCC for political ends.

In 2003 the satellite altimetry record was mysteriously tilted upwards to imply a sudden sea level rise rate of 2.3mm per year. When I criticised this dishonest adjustment at a global warming conference in Moscow, a British member of the IPCC delegation admitted in public the reason for this new calibration: ‘We had to do so, otherwise there would be no trend.’

This is a scandal that should be called Sealevelgate. As with the Hockey Stick, there is little real-world data to support the upward tilt. It seems that the 2.3mm rise rate has been based on just one tide gauge in Hong Kong (whose record is contradicted by four other nearby tide gauges). Why does it show such a rise? Because like many of the 159 tide gauge stations used by the National Oceanic and Atmospheric Administration, it is sited on an unstable harbour construction or landing pier prone to uplift or subsidence. When you exclude these unreliable stations, the 68 remaining ones give a present rate of sea level rise in the order of 1mm a year.

If the ice caps are melting, it is at such a small rate globally that we can hardly see its effects on sea level. I certainly have not been able to find any evidence for it. The sea level rise today is at most 0.7mm a year — though, probably, much smaller.

We must learn to take the environmentalists’ predictions with a huge pinch of salt. In 2005, the United Nations Environment Programme predicted that climate change would create 50 million climate refugees by 2010. That was last year: where are those refugees? And where are those sea level rises? The true facts are found by observing and measuring nature itself, not in the IPCC’s computer-generated projections. There are many urgent natural problems to consider on Planet Earth — tsunamis, earthquakes, volcanic eruptions not least among them. But the threat of rising sea levels is an artificial crisis.

Nils-Axel Mörner was head of paleogeophysics and geodynamics at Stockholm University (1991-2005), president of the INQUA Commission on Sea Level Changes and Coastal Evolution (1999-2003), leader of the Maldives sea level project (2000-11), chairman of the INTAS project on geomagnetism and climate (1997-2003).
]]> Environmental http://www.brentwheeler.com/index.php?itemid=928 Thu, 22 Dec 2011 10:55:46 +1300 http://www.brentwheeler.com/index.php?itemid=927 From Greece to Washington to New York state, there's no effective mechanism to control spending.

By DAVID MALPASS

Across Europe and the United States, the fiscal crisis is setting up an epic battle among government services, pensioners, government employees, creditors and taxpayers. There is simply not enough money coming in to pay all the promises politicians have made. The shortfalls and fights are challenging our democracies and shifting wealth from the private sector to ever bigger government.

The hope has been that Europe's debt crisis would force government downsizing in time to meet cash flow requirements. Newfound fiscal discipline would provide a silver lining to the debt crisis. But that's not working out.

Germany's insistence on centralized fiscal discipline for the euro zone will lead to a massive expansion of bureaucracies in Brussels, Frankfurt and Berlin. They'll include temporary and permanent bailout funds, dangerously intrusive powers for the International Monetary Fund and the European Central Bank, endless summits, new taxes on property, and recessions.

With Europe's government structures assured of getting even bigger, the U.K. reacted immediately by opting out. U.S. lawmakers are already objecting to the European plan to expand the IMF. As in Greece, IMF programs are antigrowth, imposing austerity on the private economy, not the government. Greece has raised value-added and property taxes, then projected revenue increases that never materialize in order to keep payments flowing to creditors and the government's entourage.

Governments on both sides of the Atlantic are trying to use the crisis to grow rather than shrink. News of Europe's fiscal incompetence abounds, but Washington had no budget at all in 2010 or 2011 and the federal deficit grew at record pace. President Obama sailed through 2011 without any significant spending cuts or government downsizing.

With year-end approaching, the federal budget horizon has contracted to two weeks. Common practice is for Congress and the president to spend as much as possible in December and then adjourn, hoping voters will forget about it after New Year's Eve.

Financial markets are so sensitive to the $3.6 trillion in annual federal spending that they would likely see huge gains if Congress simply adjourned without the normal year-end blow out. Even better would be for the president to call a January cabinet meeting with the purpose of cutting spending and regulation to encourage private job growth.

In February, President Obama will be able to impose another $1.2 trillion debt-limit increase using special voting rules forced through Congress last August to avoid a government shutdown. It should be clear by now that politicians will not voluntarily reduce government or government debt. The so-called debt limit is harmful because it threatens default and broad government shutdowns, both unacceptable, but doesn't limit spending at all.

The debt limit should be replaced with a new debt ceiling that forces Washington to cut spending. When the debt-to-GDP ratio is above target, Washington should suffer escalating penalties on its power, benefits and spending authority. There should be no threat of debt default or government shutdown. Instead, Washington should face a benefits straitjacket that is so uncomfortable for the president, his senior executives and Congress that they work around the clock to enact spending cuts and asset sales to bring debt back below target. They should get a bonus if they get the job done and embarrassing, escalating penalties if they don't.

Here are some possible penalties: 1% pay cut per month for the 10,000 highest-paid government employees with a prohibition on it being restored; suspension of limousines for assistant secretaries and higher; market-rate monthly fee for free government parking. During periods of excess debt, the president should have impoundment authority but also be required to write a monthly letter to Congress stating preferred spending cuts equal to 20% of the fiscal deficit.

Grappling with out-of-control government spending in southern Europe, Germany is seeking automatic penalties when fiscal deficits are too large. The problem is that governments will probably write the penalties so they hit taxpayers and the private sector. It's unlikely European governments will write penalties aimed at themselves. There's already talk of the bloated Italian government taxing the property of the Catholic Church to avoid spending cuts and asset sales.

Across the U.S. and Europe, big government is winning the crisis game, adding taxes, regulatory power and whole new institutions. Voters want restraint, but there's no mechanism to control government spending, so debt-to-GDP ratios go up rather than down.

Even at the state and local level, which is supposed to be closer to the people, governments find ways to grow. In an age-old government shell game, tax increases are projected to cause big revenue gains, which governments rush to spend. When actual revenues fall short, the government blames the economy, borrows the shortfall, and proposes new taxes, creating a debt cycle.

This budgeting trick is replayed year after year around the nation. New York state demonstrated this last week with Gov. Andrew Cuomo's $2 billion increase in annual income taxes to "balance the budget." The increase in projected tax revenues will allow a major increase in state spending in 2012. And despite balanced budget requirements, New York state and local debt has surged above $300 billion.

One of the few hopeful signs in the two-continent budget mess is that a few U.S. states and localities are experimenting with different political responses, some of which will promote growth. Wisconsin's government stopped collecting union dues, changing the balance of political power. Heavily Democratic Rhode Island passed a law allowing a hybrid 401(k) pension system, a key structural reform that would transform the nation's fiscal outlook if widely adopted.

The fiscal questions facing Europe and the U.S. are central to our democracies. Can politicians be incentivized or penalized enough to lead a downsizing of government? Which unaffordable contracts and promises should be reduced? How fast will the outlays grow for lifetime pensions and retiree health care?

To win elections, politicians have promised practically endless government spending and covered up the cost, leaving generations of taxpayers obligated to pay off the debt. That's wrong, but neither the U.S. nor Europe has a plan to stop it. A first step would be to use more effective debt and deficit limits to force governments to spend less and end the debt cycle.

Mr. Malpass, a deputy assistant Treasury secretary in the Reagan administration, is president of Encima Global LLC.
]]> Policy http://www.brentwheeler.com/index.php?itemid=927 Mon, 19 Dec 2011 09:59:59 +1300 http://www.brentwheeler.com/index.php?itemid=926
Posted: 08 Dec 2011 04:30 AM PST

It's generally true that writing gets better with each draft, but at some point a writer must stop, as his cost of re-drafting exceeds his benefit (the benefit to readers is a different story).

But sometimes we get the chance to re-write an earlier work, not just to finesse the original perspective but to add wisdom and highlight important points.

Edwin G. Dolan has taken this second path with his "Version 40.0" 2011 update of his 1971 book, TANSTAAFL (There Ain't No Such Thing As A Free Lunch) - A Libertarian Perspective on Environmental Policy.*

Now some readers may be tempted to stop reading this review, since they are not interested in a "libertarian" book on environmental policy. Don't libertarians, after all, think that money should determine who gets what, in some kind of Darwinist struggle to allocate rainforest to the richest?

Not really, and definitely not in this book.That said, Dolan doesn't shy away from highlighting the dangers of government failure and command and control myopia. In fact, he does an excellent job of exploring the tradeoffs between individual liberty and government guidance when it comes to managing our environment -- saying things I've said in the past, but adding more discussion that I wish I had and explaining more clearly than I ever did.

In other words, I like this book. I like it in the same way as I like "Economics in One Lesson" [free download], which I assigned to my Environmental Economics and Policy class at UC Berkeley, and I'd definitely assign this book to ANY class with "environment" in the title. It's important to note that the book is written in clear prose, with no equations and only a few simple tables and figures. Fantastic.

And here's the coolest thing about this book: Each chapter has two parts -- the 1971 original and the 2011 update on "what's changed" and "what hasn't changed." I really liked this structure, as it revealed how much economists had to say so long ago (the first Earth Day was in 1970!) as well as bringing the reader up to speed on current events.

The book starts with its awkward title, i.e., every decision involves tradeoffs. I make this point to environmentalists when I talk about water:
The only way to leave the environment intact is to take ZERO water; that action would result in a 90% population shrinkage as we returned to a life of hunter gatherers. If you want that, fine, but if you want a modern life, then you must agree that SOME water is going to be "taken" from Nature. The only question is "how much?"
Let's go over the chapters:
1. A comparison of "throughput" and "closed loop" economies in which Dolan points out how the throughput basis of GDP distorts policies and decisions. In his 2011 addendum, Dolan points out the silly nature of policies designed around "willingness to pay" that do not actually involve payment. This paragraph alone should get about half the environmental economists in trouble (hear me guys?). He then goes on to demolish the "affordable energy" lobby (oil companies that like subsidies).
2. A nice explanation of basic economics (in 9 pages!), i.e., how the law of decreasing marginal benefit and diminishing returns result, respectively, in the laws demand and supply. His 2011 addendum demolishes crony capitalism ("Drill baby drill") and silly regulations, e.g., CAFE fuel standards dedicated to protecting America's dinosaur car companies.
3. A move from market distortions to market failures and a discussion of pollution (negative externalities), property rights, tort laws and regulation. Dolan (like me in my book) points out that regulation can not only interfere with the discovery of "efficient" levels of pollution, but it can also fail to compensate those who are harmed by pollution AND result in far more pollution. In his update, he writes out the 20/80 rule (p. 77):
Putting a price on pollution is by far the best way to affect the behavior of people who are neither environmental activists nor environmental skeptics, but are simply indifferent.
That said, he also supports government and non-government involvement when it's too difficult to use price signals.
4. Dolan covers "political economy" (oh boy!) and my favorite topic: who gets the costs and who gets the benefits from policies and how are we to organize collective action to make sure that the majority are not over-run by special interests (aka governments do not impose regulations ON industry; governments provide services TO industry via regulations). Wow. Every environmentalist should keep this chapter on the bedside table.
5. Ehrlich, Malthus, The Limits to Growth [my review] and steady-state ideas. Dolan's discussion of anti-population (Ehrlich) vs. pro-population (the Pentagon) views is still timely, but he falls (surprise!) firmly on the side of individual choice AND an end to "pro-child" ideas like welfare payments for children, etc. In his update (7 billion people!), Dolan is neither optimistic (per Julian Simon) nor pessimistic (per Population Council); he ends with a plea for a woman's informed right to choose how many children she wants. (Read, via AW, Herman Daly's comment on how we've passed the limits to net-positive growth.)
6. A discussion of economic development and the environment in which Dolan brings up one of my favorite taboos: if we find the way to feed the poor, then what do we do when they have children who are hungry? This awkward question should be debated every day in every aid agency that delivers superficial help (the fish) without deeper solutions (teaching the poor how to fish). He goes on to discuss the demographic transition and environmental Kuznets curve. In his 2011 update, he compares the good news (most people's lives are improving) to the bad news (massive corruption still harms many).
7. A discussion of government intervention -- for better or for worse -- and the special interests (from oil to greens) who profess to speak for the People. Dolan wishes that government would get out of the business of destroying the environment (e.g., USACE and their silly cost-benefit) but also that environmentalists would support non-elitist outdoors (hear that Restore Hetch Hetchy?)
8. A discussion of the steady state economy (don't) and plea for individual decisions instead of delegation to a "Central Environmental Administration" (the EPA was founded in 1970, so this is a funny term) in the move towards a sustainable macro-economy. In his 2011 update, Dolan reaffirms the power of prices over regulations (e.g., lightbulb prices vs bans).
That's where the 1971/2011 update ends, but Dolan adds a fascinating chapter on climate change and climate policy (reprinted from a 2006 CATO Journal article) in which he says that there's too much risk to wait for iron-clad proof of climate change AND that those who have committed the harm (more the US than China) need to pay the costs of mitigation and (Dolan also emphasizes) adaptation. These arguments are firmly grounded in libertarian economic theory (Coase, Hayek, Locke, et al.)

Bottom Line: I give this book a very firm FIVE STARS. Anyone interested in the environment (science, policy, economics, life) should read it -- and then go out and tell some emperors that they are naked!
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]]> Environmental http://www.brentwheeler.com/index.php?itemid=926 Sun, 11 Dec 2011 10:18:36 +1300