The Pebble and the Avalanche

The Low Emission Car Problem

Honda will release an automobile that uses hydrogen as fuel; the car will be available in Japan and in a few parts of California starting in the autumn of 2008.

Automobiles are part of a system that includes roads, traffic signals, repair shops, spare parts manufacturers, and — above all — fuel supplies. The world has a fine network of gas stations, and it's easy enough to run an electrical cable to an outlet to re-charge an electric car; but introducing an entirely new type of fuel means building entirely new and expensive infrastructure.

The creation of this new infrastructure is a problem in disaggregation that has yet to be solved. I suspect that the solution will lie in some interesting new thinking about what it means to be an automobile manufacturer, what it means to be a service station, and what it means to be a public utility.

Topics:  · government · technology

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Is "Prison Culture" Behind Chicago's Crime Wave?

According to an article by Gary Fields in the Wall Street Journal, former prison inmates bring their "prison culture" with them to the streets once they leave jail. This prison culture emphasizes "respect," which doesn't mean what I would think it means; and of course disputes are resolved by violence. The article then goes on to claim that because so many individuals in the US are incarcerated at some point in their lives, this prison culture is spreading across our cities and makes a noticeable contribution to violent crime. The City of Chicago experienced a small spike in murders recently, but with a sharp increase in deaths of school-age youth, and Mayor Daley is using this as an excuse to promote his anti-gun campaign.

While this article caught my eye — I began to wonder how disaggregation affects the connection between offender, victim, prison culture, and crimes — I would like to caution that I have to take the article with a huge grain of salt. The Wall Street Journal seems to have a cabal of reporters who promote Hillary Clinton with a stream of articles that read as if they come directly from her campaign headquarters. The most recent example was an extraordinarily poorly-written article on health care in the US, with a heavy emphasis on denigrating the management of non-profit hospitals.

This "prison culture" article carries a tell-tale quote from David Kennedy of the Center for Crime Prevention and Control: "This is part of the price we're paying for 20 years of mass incarceration." The notion that the prison population is too high is a common refrain in certain political circles.

While I've spent a while this morning trying to find some statistics on crime, the subtle political slant of this article is so unpersuasive that I think I'll put the entire question aside.

Topics:  · government · society

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If Only American Airlines Were Certified Kosher

A few days back I wondered about the lessons of the American Airlines business disaster: what did it mean for Southwest Airlines, for example, and how could other airlines avoid similar costly problems. Could disaggregation play a role? For example, should American diversify its fleet and not rely so heavily on MD-80 jets?

But then I realized American Airlines' biggest problem: it isn't certified kosher.

Did you ever wonder how Jews find out what foods are kosher? (Or how Moslems find out what foods are compatible with Halal?) Different organizations across the country are hired by manufacturers to certify food as kosher; the manufacturer is then allowed to place the organization's logo on the packaging and those who are interested recognize the logos. Here in Chicago, for example, there's one large organization with almost national scope; a few smaller organizations of various sizes (and perceived reliability); and local representatives of the two national certification organizations. If I'm a manufacturer and I want my food certified for the kosher market, I have a choice of who will regulate me.

On the one hand, each organization must be strict — otherwise no one will trust their certifications and their endorsements become worthless; in other words, they compete on the basis of how well they can guarantee compliance with kosher standards. On the other hand, again because the organizations compete with each other, they cannot be wildly unreasonable towards the businesses they regulate (although that certainly happens, because once a business hires a kosher certifying organization, it's rather difficult to switch to another). And for the most part the certification business is congenial: organizations know about each others' inspections and how they interpret the rules about kosher foods, and "as long as everything is kosher" they'll accept each others' certifications.

The FAA ordered American Airlines to ground all its MD-80 airplanes because the ties on wire bundles are one and one-quarter inch apart instead of one inch apart, even though the FAA knows the problem is not urgent. Why can the FAA act so arrogantly and arbitarily? Because they're the government: they have monopoly power. Now imagine if an auditor you had hired did something wildly unreasonable that cost you tens of millions of dollars. Not only would you never hire them again, but everyone else in the industry would avoid them like the plague.

So the answer to the huge fines (Southwest Airlines) and huge business losses (American Airlines) of the past few weeks is not better enforcement; the answer is competition in the world of airline regulation. Let's adopt the kosher-certification model to lower costs and improve overall saftey.

Topics:  · business · government

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Seven Years Later: 7,305,550

I'm always somewhat bemused by the fact that the way I find out about my own patents is not because the government's Patent Office contacts me; not because the company I work for (or worked for in the past, in this case) contacts me; but because a private company that sells commemorative patent plaques contacts me to see if I want to purchase one. The profit motive trumps bureaucratic inertia every time.

I've just received patent 7,305,550, which I first applied for almost exactly seven years ago. Given that it's bouncing between Intel's lawyers and the patent office all this time, I hesitate to say exactly what the patent covers; from reading the abstract, the patent seems to have retained its original purpose, which is to help authenticate people over the telephone using biometrics stored in a central server.

I recall being careful when I wrote this patent to make certain that the innovation was genuine and that I didn't inadvertently damage my industry's ecology by staking out some territory that wasn't really mine. Today I'd be even more careful, as patents have become scarier over the years. Starting in the mid-1990's, the patent office issued many vague patents for "innovations" that were completely obvious to anyone skilled in the art but not to the patent office examiners. The glut of rotten patents gave rise to the "patent trolls" who perform no innovation but simply loot the real innovators who have built real products. Given the huge damages to both individual companies who are caught out by the patent trolls, and the damage to the US economy that results from improper ownership of innovation, I expect that the laws will change to make challenging patents easier.

Topics:  · business · government · innovation

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Verizon Notifies You (and Criminals) When You Call 911

When you dial 911, your Verizon phone emits a tone that can be heard several feet away. I know that I'd like to be able to dial the police without alerting everyone in the vicinity.

Topics:  · government · telecommunications

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Your Personal Bill: $4.544 Billion for Infringement

The U.S. Constitution allows for copyright and patents in order to promote the free dissemination of ideas and inventions. Today's copyright laws were written for the specific purpose of protecting Disney from losing its exclusive rights on old Mickey Mouse movies; over the past decades, each time the copyrights on films from the early years were about to expire, Congress modified the laws to extend Disney's franchise.

If you take the copyright laws and court decisions seriously, and total up the "infringements" for which you have legal and possibly criminal liability, a professor at the University of Utah shows that an average person — in the course of a year of ordinary activities — may be liable for up to $4.544 billion per year in penalties.

Topics:  · government · intellectual+property

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Shared Financial Risk: Possibly Good Idea, But Terrible Execution

The Centre for Economic Policy Research proposes that "risk" be "shared" when a company sells securitized financial instruments. The basic idea is that if the seller makes an error in evaluating the risk involved, the purchaser isn't the only one to suffer.

On first glance, I can argue that they're proposing disaggregation of ownership. Instead of an absolute sale, with ownership as a monolithic block, the ownership will be parceled out among various buyers. (Of course, this is the entire idea behind securitized mortgages in the first place, and explains why the revolution swept the financial industry.) When I first read this article, I couldn't decide if the ideas it describes were very good or absolutely terrible. After some consideration, I've decided that the ideas are possibly correct but the proposal for how to execute them in practice is absolutely terrible.

At present, there's nothing (aside from government regulations, perhaps) that restricts the buyer and seller from sharing ownership of the security, or at least sharing risk; they can write the contract however they please. They haven't done so in the past, because ownership of these types of objects seems to work better when ownership is absolute. Caveat emptor isn't just an empty phrase; my ability to sell an object as a complete object, without reference to any prior ownership, is one of the foundations of modern capitalism and carries with it the obligation on the buyer to perform due diligence.

This proposal strikes me as remarkably superficial and not fully thought out. Who will enforce the amount of risk that must be shared? The government, of course; this will inevitably impose a huge financial burden on sellers and buyers as well as provide a playground for post-hoc lawsuits. Other problems abound; for example, If company A sells a security to company B, and then company B sells it to company C, who is responsible for explaining the risk to company C?

Finally, the real question is whether or not this law would possibly have made any difference to the current "crisis" and whether it would actually avert a future crisis. The sellers, buyers, and everyone in between made mistakes in judgment about the risks involved; they're all paying the price; what difference would this proposal make?

Topics:  · business · finance · government

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Your Debt vs. Your Real Debt

Regardless of what your credit card agreement or mortgage loan documents might say, federal, state, and local laws strongly determine your obligations to your lender. There's a paper version of the obligations vs. the real obligations; they're disaggregated from each other, and the relationship between your paper obligations and your real obligations continues to change.

A couple of years ago credit card companies, after years of handing out credit cards like candy to children, faced the typical aftermath: rising defaults and bankruptcies resulting with lower profits. The companies adopted a novel approach to the problem: they persuaded Congress to alter the laws of bankruptcy filing. Your debt, which you'd assumed under one set of rules, was suddenly governed by a very different set of rules, and this helped prop up the profits of the lenders.

Now the wheel has turned again. Today's Wall Street Journal (page A6) reports that Congress may consider another round of reforms in bankruptcy laws; for example, judges may be allowed to re-write the terms of a mortgage loan and bankrupt borrowers might once again be allowed to write off certain debts. Lenders, as might be imagined, are attempting to defend the gains they made two years ago.

I find the interplay of the various type of disaggregation in the mortgage and credit industry to be quite complex. In this particular case, the authority to alter the terms of debt obligation — the collection practices, the maximum legal rates, and the use of bankruptcy to dissolve debt — is shared between the government and the lenders, and this sharing relationship isn't a partnership but a contest. It's an unusual situation that's worth watching.

Topics:  · finance · government

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A Closer Look at the Job Creation Numbers

A very interesting, close-up look at the "Non-Farm Payroll" numbers that the US government publishes on a regular basis. The author disaggregates the contributions of actual surveyed data from the contributions of statistical adjustments and comes to conclusions that contradict the usual evaluations.

Topics:  · government

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Redlining Real Estate on the Web

Although it's ultimately futile, many professions continue to fight back against the World Wide Web in an attempt to retain their privileged positions. Travel agents didn't succeed; but in many states automobile dealers managed to get laws passed to protect their franchises, and funerals homes continue to fight a holding action. Wine, beer, and alcohol have started to lose headway, but in many states still manage to cling to their archaic post-Prohibition market structure.

In an amusing round-up, this article notes that realtors continue to "redline" the Internet. A combination of laws, private contracts, and monopolistic practices act to push competitive services out of certain states.

Topics:  · business · government

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