Tuesday, May 25, 2010

What is the problem with the EU? Maybe Not what You Think

Daily it seems the woes of the PIIGS spread – most recently bank failure in Spain hard on the tales of the Greek tragedy papered over through the world’s largest cross subsidy to date. Frailty seems to abound.

A friend who – like a very large number of people including me – has a great fondness for all that is or was Europe – finds it hard to conceive of collapse let alone why this catastrophe may be upon us.

The standard economic diagnosis is of course quite correct – decades of dependency policy with the inevitable and rising fiscal cost that brings, labour markets paralysed by regulatory strictures which generate the very unemployment they seek to avoid while channelling rent  to the lesser deserving and so on.

The widespread knowledge of these and numerous other policy ills has done nothing to promote change and their reform seems distant in the extreme. Certainly the recent wild debt binge will bring no life saving reform.

What seems no longer to be noticed though, is that the very concept of the “EU” is now and always has been flawed. The idea of the EU as an “economic major… an economic force to be reckoned with” is based on some kind of trade penis envy in which sheer size generated by political and administrative “grouping” is somehow superior and could trade with majors such as Japan, the U.S and others.

This BLOC notion seems to me to characterise Europe in precisely the wrong terms. It ignores or rather tries to supplant the essentially niche nature of the nuanced complexity which centuries of historical, cultural, social and economic development have brought to a series of quite distinctive countries.

Those niches can operate successfully – very successfully, albeit with the proviso that broadly market oriented or at least not market destroying, policies are maintained. Like all niches however the game is about specialisation, competitive advantage, comparative advantage and working to distinctive strengths.

What does not work is the “build a bigger fruit salad” approach. Trying to run trade blocs which blow the person you are trading with out of the water has a dismal success rate. Worse that approach has two major problems.

First it destroys the distinctiveness which is essential to trade and survival – as parodied decades ago on television’s “Yes Minister” in an episode featuring the need to reject the “Euro-sausage”.

The worst excesses of the innovation killing fruit salad is epitomised by the entire concept of “Brussels” as it has become – an administrative and political machine which strangles initiatives in numerous fields – and at vast cost.

Second the misguided prospect of wealth through scale, or at least redistribution from the centre to the periphery, has those on the fringes lining up at high speed in search of “whatever it takes” to get into the soup kitchen.

As with any dependency  driven welfare system this destroys the finances of the donors while making things worse for the recipients – thus those who have most recently signed up “for the dole” – the PIIGS - have begun the slaughter of the finances of continental Europe while getting themselves further in the mire.

Should this unholy mess – put together by those who believe that politics rather than competitive markets have the power to produce wealth – fly apart this might be the very best thing that could happen since a return to the profitable niches – and all that so many admire about those niches - might be possible.

That fruit salad currency the EU – a daft concept for all the above reasons – appears (exactly as we would expect) to be leading the way.

Those on the side of the bureaucratic Goliath who doubt this analysis might ask themselves why the  Swiss – for centuries one of the world’s most stunning niches on every front - are not members of the EU nor even vaguely interested in joining the queue.

Reasonable bet? Long the Swiss franc against the Euro…. in spades.

Monday, May 17, 2010

Diary of an Outside Listener stuck in NZ

1.  The Band Rock of Ages

2. Little Feat “The Last Record Album”

3. Donald F “The Nightfly”

4.  Getz Gilberto 1962

5.  Grateful Dead “From the Mars Hotel”

Tuesday, May 11, 2010

Having here

In New Zealand – and most western economies, some claptrap about “unique surroundings”, cost of staff and other “surcharge” drivel is used to charge a premium for “eating in” even when the food is identical to that which can be purchased and taken away.

Today in Singapore I saw a sign advising patrons not “having here” that there was a charge ($0.20) for takeaway. Eating out is so common that it is the nuisance value of preparing a takeaway rather than “having here” which commands the premium.

Wednesday, May 5, 2010

Second Life: Property rights…. virtually

Second Life Users File Class Action Lawsuit Over Virtual Land

A group of Second Life users is suing Second Life’s creator over a virtual land dispute. They say their contractual property ownership rights have been changed and that this alteration of the terms of service constitutes fraud and violates California consumer protection laws.

Before you scoff too much at this seemingly ludicrous lawsuit, remember that virtual worlds aren’t just “funny money” and avatars. They’re serious business, both for the owners and investors who profit from them and for the users who pump hundreds and even thousands of dollars each into creating characters and interacting online.

Second Life’s parent company, Linden Labs, was recently valued at $383 million. The virtual world’s economy was at an all-time high when Q1 transactional data was reported last month. And although the economy is virtual, remember these transactions have a basis in very real funds.

The lawsuit gives rise to the question: Who owns virtual goods, the creators of the goods or the people who have paid virtual currency for them?

The users are claiming that Linden Labs and Founder Philip Rosedale persuaded them to invest money and pay a sort of “property tax” with the promise of actual ownership of virtual land. Now, the users say, the terms of service have been changed without their prior knowledge or consent. They say the new terms “state that these land and property owners did not own what they had created, bought and paid for, and that these consumers had no choice but to click on a new terms of service agreement or they could not have access to their property.” Moreover, the group alleges that Linden Labs froze user accounts and deleted or converted non-virtual currency and virtual property without giving any explanation or avenues for recourse.

We’ve contacted Mr. Rosedale for comment and will update this post as new information becomes available.

What do you think: Is this a frivolous lawsuit over a virtual non-issue? Can anyone really “own” pixels? Did Linden Labs have the right to change the TOS for their own product, just as Facebook does on a regular basis? Or do these users have a justifiable complaint when they say that Linden Labs broke its promise to them?

Through Marginal Revolution

Monday, May 3, 2010

The Cullen Nudge and the need for more stupidity….

Join KiwiSaver and become a living part of a process which will…

  1. Instantly capitalise a $3,000 gift (or $5,000) after two years into the price of housing. The cheaper the house price the greater the proportional impact. Those not getting the gift still face the increased price as they house hunt.
  2. Divert yet more money into the overheated housing market while taking out of the hands of job creating employers with the worst hit employers being the smallest and facing the biggest threat from cost increases at the margin… great for job seekers this is.
  3. And of course, If $3,000 makes the difference, then as Cactus points out, the house likely cannot be afforded. So the gift generates a nice little bit of sub prime risk…. which in spite of 50 finance companies falling, someone will be keen to lend on.

KiwiSaver author Mary Holm says the grant is "terrific" news….

and that:

“Every first-home owner in New Zealand is a bit stupid if they haven't been in KiwiSaver,"

To be fair she is reflecting the widespread notion that “you’d be a mug not to take the governments free money”. Understandable sentiment and maybe it works for the individual – it certainly works for the providers….

But policy wonks are supposed to understand these collective action problems which generate long run harm for society as a whole.

Ironic that the Cullen nudge favours short term gain for individuals at the expense of the collective good.

Sunday, May 2, 2010

All xenophobes should read this….

IMMIGRANTS benefit America because they study and work hard. That is the standard argument in favour of immigration, and it is correct. Leaving your homeland is a big deal. By definition, it takes get-up-and-go to get up and go, which is why immigrants are abnormally entrepreneurial. But there is another, less obvious benefit of immigration. Because they maintain links with the places they came from, immigrants help America plug into a vast web of global networks.

Many people have observed how the networks of overseas Chinese and Indians benefit their respective motherlands. Diasporas speed the flow of information: an ethnic Chinese trader in Indonesia who spots a commercial opportunity will quickly alert his cousin who runs a factory in Guangdong. And ties of kin, clan or dialect ensure a high level of trust. This allows decisions to be made swiftly: multimillion-dollar deals can sometimes be sealed with a single phone call. America is linked to the world in a different way. It does not have much of a diaspora, since native-born Americans seldom emigrate permanently. But it has by far the world’s largest stock of immigrants, including significant numbers from just about every country on earth. Most assimilate quickly, but few sever all ties with their former homelands.

Consider Andres Ruzo, an entrepreneur who describes himself as “Peruvian by birth; Texan by choice”. He moved to America when he was 19. After studying engineering, he founded a telecoms firm near Dallas. It prospered, and before long he was looking to expand into Latin America. He needed a partner. He stumbled on one through a priest, who introduced him to another devout IT entrepreneur, Vladimir Vargas Esquivel, who was based in Costa Rica and looking to expand northward. It was a perfect fit. And because of the way they were introduced—by a priest they both respected—they felt they could trust each other. Their firm now operates in ten countries and generates tens of millions of dollars in annual sales. Mr Ruzo wants the firm, which is called ITS Infocom, to go global. So although he and Mr Vargas Esquivel natter to each other in Spanish, they insist that the firm’s official language must be English.

Trust matters. Modern technology allows instant, cheap communication. Yet although anyone can place a long-distance call, not everyone knows whom to call, or whom to trust. Ethnic networks can address this problem. For example, Sanjaya Kumar, an Indian doctor, arrived in America in 1992. He developed an interest in software that helps to prevent medical errors. This is not a small problem. Perhaps 100,000 Americans die each year because of preventable medical mistakes, according to the Institute of Medicine. Dr Kumar needed cash and business advice to commercialise his ideas, so he turned to a network of ethnic Indian entrepreneurs called Tie. He met, and was backed by, an Indian-American venture capitalist, Vish Mishra. His firm, Quantros, now sells its services to 2,300 American hospitals. And it is starting to expand into India, having linked up with a software firm there which is run by an old school chum of one of Dr Kumar’s Indian-American executives.

Ethnic networks have drawbacks. If they are a means of excluding outsiders, they can be stultifying. But they accelerate the flow of information. Nicaraguan-Americans put buyers in Miami in touch with sellers in Managua. Indian-American employees help American consulting firms scout for talent in Bangalore. The benefits are hard to measure, but William Kerr of the Harvard Business School has found some suggestive evidence. He looked at the names on patent records, reasoning that an inventor called Wang was probably of Chinese origin, while some called Martinez was probably Hispanic. He found that foreign researchers cite American-based researchers of their own ethnicity 30-50% more often than you would expect if ethnic ties made no difference. It is not just that a Chinese boffin in Beijing reads papers written by Chinese boffins in America. A Chinese boffin in America may alert his old classmate in Beijing to cool research being done at the lab across the road.

Network effects

In Silicon Valley more than half of Chinese and Indian immigrant scientists and engineers report sharing information about technology or business opportunities with people in their home countries, according to AnnaLee Saxenian of the University of California, Berkeley. Some Americans fret that China and India are using American know-how to out-compete America. But knowledge flows both ways. As people in emerging markets innovate—which they are already doing at a prodigious clip—America will find it ever more useful to have so many citizens who can tap into the latest brainwaves from Mumbai and Shanghai. Immigrants can also help their American employers do business in their homelands. Firms that employ many ethnic Chinese scientists, for example, are more likely to invest in China and more likely to do so through a wholly owned subsidiary, rather than seeking the crutch of a joint venture, finds Mr Kerr. In other words, local knowledge reduces the cost of doing business.

Immigration provides America with legions of unofficial ambassadors, deal-brokers, recruiters and boosters. Immigrants not only bring the best ideas from around the world to American shores; they are also a conduit for spreading American ideas and ideals back to their homelands, thus increasing their adoptive country’s soft power.

All of which makes the task of fixing America’s cumbersome immigration rules rather urgent. Alas, Barack Obama has done little to fulfil his campaign pledge to do so. With unemployment still at nearly 10%, few politicians are brave enough to be seen encouraging foreigners to compete for American jobs.