Follow up on the "death of newspapers."

A great article today in the New Yorker by James Surowiecki discusses the "death of newspapers," which I addressed a few days ago. While we both agree that margins for newspapers are coming down (into the red for many for sure), he's a bit more pessimistic than I am about the final outcome: "Soon enough, we’re going to start getting what we pay for, and we may find out just how little that is."

That may be, although I think that we'll still get quality news, just via other media.

Here's the part, though, that I loved - I think he makes my point exactly (I am one of the "many" in the last sentence):

Papers now seem to be the equivalent of the railroads at the start of the twentieth century—a once-great business eclipsed by a new technology. In a famous 1960 article called “Marketing Myopia,” Theodore Levitt held up the railroads as a quintessential example of companies’ inability to adapt to changing circumstances. Levitt argued that a focus on products rather than on customers led the companies to misunderstand their core business. Had the bosses realized that they were in the transportation business, rather than the railroad business, they could have moved into trucking and air transport, rather than letting other companies dominate. By extension, many argue that if newspapers had understood they were in the information business, rather than the print business, they would have adapted more quickly and more successfully to the Net.

A small step in the right direction

This from the Wall St. Journal today: the RIAA is going to stop suing file sharers. Well, at least they'll be doing less of it and trying other things first.

I think that this is a sign that the RIAA is finally starting to realize that while they may be morally and legally justified in suing people who swap music files, there is a huge difference between what is justifiable and what is sensible.

I'm still not super happy with this because the RIAA is still using ISPs as their enforcement mechanism, but at least it is a lot less heavy handed and it seems to have an actual process around it, and one that protects privacy at least somewhat.

A journey of 1000 miles begins with a single step.

A Music Tax?

Over the past few months there have been a number of proposals for ISPs to assess a fee from users to cover the cost of unauthorized music sharing. One such proposal is discussed here.

The theory behind the proposal sounds reasonable, at least at first blush: by collecting a fee, labels and artists would be compensated for their music and people would not have to worry about being sued. The recording industry and their artists are (arguably - more on this below) losing a lot of money to illegally shared music. This is no different from shoplifting. Retailers cover their shoplifting costs by raising the prices for everyone, so one can see the motivation here.

But this is a seriously flawed idea for a number of reasons. There is a great writeup of why it is a bad idea, but I'll weigh in with my argument.

The biggest problem with this model is that it rewards bad behavior on two levels. At the consumer level, it provides an actual disincentive to legal purchasing of music. After all, if I have to pay the fee, then why should I pay for music a second time? In fact, this model proposes to punish the very people who are the paying customers that the labels and artists should want to encourage while rewarding the very pirates who they have been vilifying and suing. There is only one word to describe this: "stupid."

But the perverse consequences are not limited to consumers: a music tax (and let's be clear, it is in fact a tax) would also reward record labels and musicians who are unskilled and who very rightly deserve to fail in the marketplace by providing them with a revenue stream that is disconnected to whatever value (artistic or otherwise) they provide. I'm hearing the word "stupid" pop into my head again, but this time with a new adjective: "insidious." This is because not only does this proposal reward entities that should rightly fail, but it's actually using independent 3rd party organizations (ISPs, college campuses, etc.) to collect these rewards.

There is a way to avoid this problem, of course. If one wants to ensure that only musicians (and their labels) whose music is being consumed get the rewards, then one simply needs to monitor what is being shared/played and assess fees based on that. But one need only think about this for a moment to realize that the privacy violations and bureaucracy requirements for such a system would make even the North Koreans blush.

All around, this proposal has good intentions but completely misses the mark in solving the "problem." Which brings me to my final point, the source of my quotes around "problem." Namely, I think the RIAA, labels, and many musicians (but not all!) are confusing "problem" with "opportunity." Let me be very clear on one point: illegal sharing of copyrighted material is theft, pure and simple. One can try to prosecute it, which has been the RIAA's favorite tactics to date (and which has not worked very well). One can try to turn illegal into quasi-legal, as this proposal tries to do. But I'd propose that the best solution is to make the illegal legal. That is, give the music away.

Obviously, this is a risky strategy, and it is something that individual musicians and labels must decide whether or not to do, rather than an industry-wide edict of some point. But it could be the most rational strategy for making money. There is a great post on this here, but my argument is quite simple: you can make more money by providing huge distribution for your music and treating it as a marketing tool to get people to attend concerts, buy merchandise, etc., than you can by limiting access to the music itself. This is a model that was not possible in the days of vinyl or CDs because of the costs of producing and distributing plastic. But today digital distribution has driven these costs to zero, so it is for the first time possible to switch from the music being the product to the music being the promotional tool.

This is not just a theoretical argument. Many bands have demonstrated that it can work. Heck, even pre-digital bands like the Grateful Dead got it: they invited their fans to record their concerts and freely trade tapes of the concerts. The net result was an almost cult-like following, and the Grateful Dead was for many years one of the top grossing acts in the country. Phish followed the same model in the 90s and was also incredibly successful, giving their music away.

Is this a threat to the traditional recording label business model? Sure it is. And it frankly shifts even more power to the musicians. The market can adapt by trying to prop-up an inefficient dying model (as the music tax proposal attempts to do), or it can adapt by switching over time to one that better serves musicians and their fans. It's clear to me which is the right model.

The death of newspapers

With the bankruptcy filing of the Tribune company last week I'm hearing a lot of talk about the "death of newspapers" again. The newspaper business has of course been declining for years now, but I think this particular phrase muddies the issue.

In particular, I think we frequently confuse the three things that comprise "the newspaper business":

• Professional journalism (as opposed, for example, to the largely amateur blogosphere) with a set of fairly widely understood principles regarding objectivity, sources, etc.
• A business model built around advertising, the two biggest components of which are ads placed by businesses to attract consumers, and consumer-to-consumer ads (the classifieds).
• A distribution model based on paper, ink, and gasoline.

I think that of these, only the first (professional journalism) is core. It is the only true value that a newspaper company brings to its readers. The advertising-based business model is simply a means to monetize that value, and paper is nothing more than a distribution mechanism. Either of these can (and indeed must!) change for newspapers to survive. But any newspaper company that hopes to survive must recognize that they are not in the "news-paper" business, but rather that they are in the news business.

I suspect that one might argue that I am mistaken, that newspapers are in the advertising business, and one might even go so far as to say that the news is a way of aggregating eyeballs for advertisers. This argument is a valid way to describe how newspapers made money once upon a time, but it is problematic for two reasons.

The first problem is that it puts advertising ahead of news as a core competency. But at the end of the day, newspapers attract readers primarily on the quality of the news (and to a lesser extent the classifieds, which I will come to shortly); they can still be a newspaper if they can monetize the news in alternative ways from advertising, but if they were to jettison the news in favor of other formats to attract eyeballs and advertisers, they would in all but the rarest cases fail because they would be competing with more pure-play advertising platforms and would be in an area outside of their competency.

But the second problem is a larger one: the very reason newspapers were able to make money - particularly in classifieds - is that they were a place of concentrated eyeballs. Once upon a time, huge portions of the population read newspapers regularly, and only had one or two major newspapers from which to choose. Advertising in a newspaper was a sure-fire way to reach a huge population, a one-stop shop. No more. TV and radio, of course, disaggregated a chunk of this a long time ago, but the Internet has disaggregated most of the rest. People get their news from a wide variety of sources, many national. Where people once relied on local broadcasters and local newspapers for all of their news, they now can get much of this from national news providers. This reduces the value to advertisers greatly. And squeezing from the other side are services like Craigslist, which I believe are the biggest threat to the classified advertising model, and which are frankly far more efficient and less expensive than the traditional advertising model.

The net of these trends is that I believe that the traditional advertising model for newspapers is essentially dead, and at the very least cannot support nearly the current number of newspapers. There is a lot of consolidation which must occur, and more companies will need to go out of business.

Ideally, these companies would be able to identify more sustainable business models to support the delivery of news; sadly, this has proven difficult: readers have not been anxious to pay for subscriptions, and few papers have found alternative advertising models that work as well as the old models once did. If I had a brilliant insight for new business models, I'd offer it here. (No, wait - I'd go off and make a mint by implementing it.)

As for the paper-based distribution mechanism, this is simply not core to a newspaper. Some news organizations are reducing or eliminating their print operations in favor of going on-line. My personal prediction is that paper will not go away until there exists low cost, high-resolution durable (i.e., capable of withstanding spilled coffee) screens that people can read at the breakfast table or on the train. (The New York Times on my iPhone actually is starting to come close to this. It's surprisingly legible, well formatted for the screen, and I can read it in all of the traditional newspaper-reading places.) Nevertheless, my point here is that paper and ink are nothing more than a slow and expensive delivery mechanism, and one which will become increasingly irrelevant; nobody should mourn this shrinkage, least of all the smart newspaper companies because printing and delivering all of that paper is a huge expense, and that expense is going down. This actually creates an opportunity to become something that it never really has been previously: a pure-play news delivery business, free to try a wide variety of models for making money. The lowering of capital costs (printing presses, delivery trucks, etc.) should enable many more niche publications to provide more variety of news at lower cost. Yes, it means employing fewer people in the industry as a whole, but there is today a lot of redundancy in this business due to its antiquated models. Just look at a press conference during the presidential race: you'd see dozens of reporters, yet there were not dozens of significantly different stories written.

But none of this means that newspapers as such are dead. Or, more importantly, that professional journalism is dying (another claim I hear all too frequently). It is certainly transforming, and yes, it is also shrinking in the process. But through all of this, I believe that the average person has more professionally reported news available to them now than at any other time in history. That doesn't seem like death to me.

Bailout for homeowners?

A lot of politicians are talking about a bailout for homeowners to match the bailout that is currently underway for the financial sector. This makes me very nervous.

I understand the motivations behind this, particularly when big businesses get a hand out but the little guy who is working hard (and may be losing his job in this recession) doesn't; there's something unseemly and unfair about the asymmetry.

But there are two key differences between the financial sector and struggling homeowners. The first (and most important) is the collateral damage: when the credit market freezes, the entire economy suffers. (See my previous post on "too big to fail.") The economy can tolerate a single institution failing - which is why Lehman and Bear Stearns were allowed to fail . But when this spreads to the industry as a whole, help is required; this is the goal of the rescue package.

And this gets to the other key difference: there are many homeowners who are in homes that they simply cannot afford or never should have bought in the first place. I hate to say this because it is a coldhearted unsympathetic thing to say, but foreclosure is not only the right outcome for these homeowners, it is a necessary precondition for the housing market and banking sectors in particular and the economy in general to recover. Keeping these people in homes that they cannot afford does no favors to anybody. The homeowners will be perpetually on the brink, the banks will continue to hold high-risk high-defaulting mortgages, and we will have done nothing to correct the overall system.

I need to clarify that I do not believe foreclosure is the right thing for all homeowners that is falling behind or underwater. There are legitimate scenarios where I believe that relief for homeowners can be justified, including:

• Victims of truly fraudulent or predatory lending.
  
• Owners who actually put down 20% and had a good record of payments but are struggling due to the economic downturn.
• Owners who have faced dramatic revisions to ARM rates, far beyond what a "reasonable" person could have expected.

Note that I say relief "can" be justified for these scenarios, not that it "is" justified. My point here is not to advocate for government relief, but rather to say that foreclosure for these sorts of scenarios strikes me as a very undesirable outcome, and if foreclosures can be mitigated through reasonable measures, that seems like a good thing.

In these scenarios, I happen to believe that the best relief is not a government bailout, but rather for the banks which hold the mortgages to renegotiate the terms to something more affordable. The bank should be motivated to do so because losing some money is certainly preferrable to writing off an entire loan, and because selling a foreclosed house in this market is clearly a money loser, and the homeowner is obviously motivated to do this because it keeps them in their house. The government - especially via its bailout - has the opportunity to prod banks here, without mandating specific actions.

On the other hand, it is the homeowners that are only in homes due to overly lax and aggressive lending standards - such as folks who never provided a down payment or who never had the income they claimed to have, and who are not able to reliably make their payments - who I'm afraid simply need to go back to square one. When they are creditworthy to appropriate standards of risk, by all means they should be given loans to buy a house, but not until then.

The problem with solutions such as Obama's proposed blanket ban on foreclosures, though, is that it is indiscriminate: it helps out some truly deserving people, but it also helps forestall foreclosure in many cases where - I'm sorry to say - a very necessary part of the nation's economic healing.

"Too big to fail"

We've heard this phrase a few times, most recently with Fannie Mae, Freddie Mac, and AIG: it is "Too big to fail." I heard it yesterday on a financial show talking about how important the banking sector is to the economy - the commentator said that if a shoe factory fails, it fails and someone else will make shoes, but if the banking sector fails (as the credit freeze demonstrates) then it creates a lot of collateral damage.

I don't have a problem with logic that declares something "too big to fail" as such, but it occurs to me that anytime we use this phrase, there are two implications which we cannot ignore.

The first is that if something is too big too fail, that it must be regulated. I'm not a fan of excessive regulation, and I believe in markets, but markets only work because the risk of failure keeps investors and businesses prudent. I.e., excessive speculation and risk taking are curbed by the possibility of losses. Take away the possibility of failure, and you are creating incentives for reckless behavior - writing bad insurance policies, loaning to people who are not creditworthy, etc. So if we are going to label an entity as being too big to fail, we must compensate for this by replacing the market-based constraints on risk taking with formal regulatory constraints. Otherwise, nothing will prevent the conditions that led to the near-failure in the first place.

The second implication is that if something is too big to fail, then there has been a marketplace breakdown that has concentrated too much market share in that entity. One of the great things about a marketplace is that their distributed nature make them resilient to individual failures - in fact, those failures are a necessary and integral part of the functioning of a marketplace. Risk taking is rewarded when wisely taken; innovation necessarily involves risks. And failure checks excessive risk taking and weeds out bad ideas and weak execution. Without failure, there can be no innovation, no learning. A marketplace that does not have enough diversity of players to suffer a periodic failure of one or more of those players is therefore not a functioning one.

A concentrated market may not rise to the level of illegal monopoly, but I would argue that it's effects can be just as bad. Therefore, per my regulatory argument above, we have a choice in these situations. We can fix the marketplace by finding mechanisms to create the distributed failure-tolerant environment I describe above that is an integral aspect of a functioning market. Or we can decide for one reason or another that we are OK with the market concentration and instead choose to replace the risk of failure with a regulatory regime.

What is not a viable option, though, is to choose not to choose. If something is too big to fail, we cannot rescue it and then do nothing to either fix the market concentration or regulate it. Otherwise, we are simply inviting more of the same problems.

Income Gap

There was a story in this morning's paper about Obama's and McCain's plans to reduce the income gap in this country. In particular, it referred to the income gap as a "problem." That word choice struck me as the problem.

In particular: is the income gap a "problem?" And if so, is it something that is a proper goal of government to fix?

I would assert that the income gap is decidedly not a problem per se. After all, if it is a problem, then eliminating it would be a good thing. But if we think about a world where there is no income gap, it is a world where everyone - by definition - earns the same amount; anything else means that there is some sort of gap. Even ignoring the socialist/communist overtones of that "utopia," it clearly flies in the face of the obvious fact that different people with different skills bring different values to the table. There is a reason that some people are paid more in some jobs than others are paid, and that's simply not a problem. And there is certainly something very disturbing about the notion that upside for innovation, entrepreneurship, or investment should be capped.

No, I think the right way to look at the income gap is that it is a symptom, an indicator of something else, which may or may not itself be a problem.

For example, I'd argue that the greater concentration of wealth in society over the past 10 years or so is indicative of a failure to invest in opportunities for broad-based wealth generation at the lower levels. When the wealthiest Americans are seeing 10% growth in earnings while the average earnings for the rest are small or stagnant, the problem is not that the wealthy are making money; it's that the rest aren't.

Is this something for government to fix? To some degree, yes: government is responsible for education, for ensuring a proper regulatory environment for jobs and growth, etc. If this leads to increased economic growth and opportunities, that's terrific. But here's the thing: that may or may not narrow the income gap, and that's OK. The most important things are total growth and that the opportunities for growth are fairly distributed; it is NOT a goal that the growth itself be evenly distributed. If the richest Americans are grow (say) 10% over some period of time while the rest of America is grows 8%, then we should be thrilled at the overall growth rather than worrying about the fact that the rich outperformed the poor.

I should also note that the financial crisis is undoubtedly affecting the richest Americans more than average Americans if only because the richest Americans have the highest percentage of their wealth in stocks and real-estate. So I predict that in the current 1-3 year period, the income gap will actually decrease. Nobody is feeling sorry for the rich because of this (nor should they), but if one is going to complain about the rich getting ahead of the rest during good times, one should in fairness acknowledge the hit when bad times arrive.

Colorado Initiative 48

Voters in Colorado next week will be voting on Initiative 48, which defines a person as beginning at the moment of conception.

I think this is terrific to get this on the ballot. Not because of the merits of the question, but because I think that this question is precisely the elephant in the room in the abortion debate (see my previous commentary on this issue). The abortion debate will continue to consist of people talking past each other so long as either side refuses to recognize that this very question is the core of the debate: nobody advocates murder or infanticide, not even the most ardent pro-choice advocate. The pro-choice argument boils down to an argument about triage (in the case of the life of the mother/incest/rape), or a personal choice unencumbered by "murder" issues precisely because the fetus is, in the mind of a pro-choice advocate, not yet a person.

So this initiative finally puts the key issue front and center. We define a moment of personhood, and from that all else will follow.

Now, of course, I think this is a case of "be careful what you ask for, you just might get it." If one defines a person - with all of the legal implications that entails - as beginning at the moment of conception, then I think there will be a raft of unintended consequences. Of course, the abortion question does indeed get somewhat settled (to the degree that it follows from the definition, even if many people do not believe it to be a wise decision), which I presume is the motivation for Initiative 48. But conferring upon a fertilized egg all of the rights of a person also necessarily means that the embryo must be protected: miscarriages, some forms of birth control, in-vitro fertilization, etc. could all very likely generate criminal scenarios where none exists today (and for which there is no controversy today).

For these reasons (and those of my earlier post), I do not believe that this is a good amendment. The definition of when personhood begins is essentially arbitrary. Frankly, I'd ask why conception as the point is a matter of religious faith for so many people when I'm not aware that any holy text address this point specifically.

Personally, I think that it's a "person" from a moral point of view sometime in the middle of the gestation (and that's about as specific as I know how to be), and from a legal point of view at birth. But I cannot defend that opinion as "fact"; it's essentially a judgment call, and a matter of consensus.

At least this ballot measure will decide what that consensus is - or what it is not.

A tale of two monuments

OK, so this isn't terribly political, but it involves Washington DC so I figure it's fair game.

I happened to be in DC this past week on business, and had some time to wander around the National Mall. It's been years since I was last able to do anything tourist-like in Washington, and therefore had not previously made it to the Vietnam memorial or the World War II memorial.

I'm not enough of an architectural critic or a monument person to offer intelligent commentary on the architecture or the symbolism or other lofty things deserving of pithy impenetrable drivel, so I won't except to say that they're both very compelling monuments.

I also thought it very touching that gifts of beer, cigarettes, and gum were left for fallen soldiers at various points along the Vietnam memorial's wall. And I think this highlights what was for me the key noteworthy difference between the memorials: the WWII memorial seems to me to be for the country, while the Vietnam memorial seems to be for Vietnam veterans and survivors. I know no Vietnam veterans or families who lost members in that conflict. As a result, by focusing so heavily on the names of the fallen, I felt no connection to it - like this monument wasn't meant for me.

I know no World War II veterans either (and certainly nobody who fell in the war), yet because this memorial focused on the group struggle - highlighting the contributions of the states and territories, the gold stars that symbolized fallen soldiers without naming them - I actually felt a much greater connection to this war which is so much further in our history. This was a memorial about the nation's sacrifice, rather than individual sacrifices.

Book Report: Hot, Flat, and Crowded

I just finished Thomas Friedman's Hot, Flat, and Crowded. I've read earlier books of his, including the Lexus and the Olive Tree and The World is Flat, so I already knew much of what to expect. I believe that Friedman has a very clear-headed approach to the problems that we face and a great way of explaining the phenomena that affect us all. Here he talks about the convergence of overpopulation, global warming, and energy, which he claims (and I agree) are the biggest long-term challenges the world currently faces.

The short summary for me is that he was basically preaching to the choir - I'm already a true believer in most of the points that he makes, he just makes them far more coherently than I am able to do. I will quibble a bit with his view of the role of government: while he's definitely a free-market advocate, he believes in a somewhat more government-directed and unified approach to solving our long-term energy needs than makes me comfortable, but I think he's got the right ideas.

This was much more of a policy book and a "frame the problem" book than Earth: The Sequel was. What I liked about Earth: The Sequel was that it almost read as an investor's guide or business school case study of clean energy; it was much less about policy (beyond the assumed axiom that a price on carbon is a must-have) and more about solutions than Hot Flat and Crowded.

I think both books, frankly, should be required reading for all politicians.

Where is Bush?

Paulson and Bernanke are all over the news - that's no surprise. But where is President Bush?

I understand that a legitimate argument could be made that in a free market system it's not proper to look to the president to solve things. I'm a pretty free-market kind of guy myself, but I think this falls flat for at least three reasons:

• His deputies are clearly improvising as fast an furuiously as they can, they certainly view it as their problem to solve.
  
• He's the leader of the country - he should be showing leadership here. Either policy leadership if he feels it's his role (which he must, per Paulson/Bernanke's fast and furious actions), or else morale leadership a la FDR.
• The lack of regulatory oversight with respect to mortgage lending standards and disclosure, investment bank leverage, accounting rules, etc., seems to me to be the single biggest factor leading to our current mess, and that regulation is the responsibility of the executive branch, which he runs. (Greed isn't the problem per se - runaway greed and competitive pressure to do stupid things is. But that's the subject for another post.) This was deliberate laxness on the part of the administration due to it's anti-regulatory bias. I understand not wanting burdensome regulation, but clearly there is a balance between two much and two little regulation, and it's pretty clear that for the past few years we've erred on the side of too little.
  

But no, he's been invisible. I can't see any grounds to give him any credit for any positive action here. Economies have cycles; I can't blame him for the fact that we're having a down cycle. But I think he deserves a lot of blame for allowing the conditions that allowed it to get this bad this fast.

Book Report: Earth: The Sequel

I just finished reading Earth: The Sequel. Global warming has not been at the top of my worry agenda, but energy has been for a while (and I figure if we solve energy then global warming will take care of itself). The climate change crowd has been arguing loudly for a cap-and-trade system to reduce greenhouse gas emissions, while the global warming deniers and other folks (primarily on the conservative side of the spectrum) worry that a cap-and-trade system would be way too much cost to the economy without any clear benefit. I've largely stayed out of that particular debate because there's so much unprovable speculation on each side. Reading this book provided concrete evidence and persuasive arguments for what I've suspected at a gut level for a long time: the argument about cap-and-trade misses the point.

In particular, there is so much opportunity for clean, affordable, renewable sources of energy and efficiency that have barely been tapped because cheap oil was so hard to compete with. But with expensive oil (it's currently down below $100/barrel, but I don't expect that to last), tapping these sources become not only feasible but downright profitable. And with a cap-and-trade system, the simple addition into the economic equation of a price for carbon provides a very tangible economic incentive to make the switch.

Cap-and-trade provides a great opportunity to lower emissions (makes the environmentalists happy), make a ton of money (makes the free-market types happy, despite their current claims to the contrary), and have a meaningful reduction in our dependence on oil, foreign or domestic (should make everyone except Exxon happy). Win-win-win opportunities like this are rare, it would be a shame to squander this.

Bush has not seen things this way, but both McCain and Obama do. I'm optimistic.

"Beyond Oil"

I just spent two days over the past week at a conference hosted on the Microsoft campus called "Beyond Oil". Its purpose was to discuss how we can successfully wean our transportation system from oil in the coming decades in a manner that is cost effective, sustainable (from both a fuel-source perspective as well as from an environmental perspective), and which enables the economy to grow. This is an area that I have been thinking a lot about (including my recent post on the need to electrify the transportation system, a point that was reiterated a lot at the conference).

This wasn’t a greenie conference, it wasn’t an alarmist liberal “global warming is going to kill us all”, nobody was talking about people sacrificing and conserving (though a lot of people talked about efficiency); it was all about how we can sustainably support our (global) growing economy and energy needs. There were more entrepreneurs starting companies and deploying technology than any other group. There were a number of people who focus on policy, as well as a number of politicians from both sides of the aisle, including Washington Governor Christine Gregoire, former senator Slade Gorton, and former CIA director James Woolsey (who talked about the national security implications of shifting trillions of dollars a year to folks like Chavez, Ahmadinijad, and the Saudis). There were academics, researchers, utilities, and mass transit operators. And thankfully, the discussions were all remarkably non-political and non-partisan. (Heck, both Obama and McCain got credit for actually recognizing the issues here and for both having reasonable approaches.)

What got me most excited was all of the talk about plug-in hybrid electric vehicles ("PHEV"), which are just like regular hybrids except that they have bigger batteries which you can plug into a wall socket to charge. I shouldn't say "talk," because there were a number of converted PHEVs on display, ranging from small cars to pickup trucks and even a converted PHEV school bus! The huge advantage of these vehicles is that on a full charge you can go 30-40 miles before the gasoline engine kicks in (at which point you behave like a regular hybrid). Given that most people drive less than 20 miles each way to/from work for most of their driving, a PHEV enables people to do most of their driving entirely on electricity (especially if they can also plug in at work). This can result in real mileage of 150-200mpg. And when you divide the cost of the battery pack by it's expected lifetime miles and add in electricity at $0.10-0.15/kWh, the cost to go a mile on electricity is only about 5-7 cents per mile. At $4/gallon, a 25mpg car costs 16 cents per mile, and that's not even factoring in the cost of the engine. The technology works well for larger cars as well as smaller (although larger cars obviously require a larger battery pack and more charge), which represents an easy way to dramatically improve mileage. There are a number of PHEV conversion kits available for existing hybrids, and the first mass-produced PHEVs should be hitting the streets in the next two years, led by the Chevy Volt.

One other nice thing about PHEVs is that they are mostly charged at night, which is when electric utilities normally have the lightest loads, so there is actually enough spare capacity in today's existing grid to handle substantial PHEV fleet penetration. Adding to this advantage is the fact that we are deploying more and more wind farms nationwide, and the wind tends to blow the most at night when demand is weakest; PHEVs, thus, provide a nice storage mechanism for wind (or other intermittant renewable) power that might otherwise go unused.

I learned a ton over the two days, and came away with a feeling that, while we obviously have major challenges ahead of us, there is a tremendous amount of opportunity here to innovate, make money, and move towards diversified fuel sources for our transportation needs.

I had 3 other observations as a result of the conference:

• It was pointed out numerous times that oil has a monopoly as a fuel for transportation today, and that electrification is key. I obviously agree with this (per my earlier post), but I want to reiterate that the critical benefit of electrification is that it is fuel neutral. Liquid-fuel engines are very sensitive to variations in the formulation of their fuel - you can greatly damage an airplane engine that runs on aviation gasoline by putting automotive gasoline in it, for example, even though the two fuels are virtually the same. But an electric engine, while sensitive to getting the right amount of voltage and current, does not care how the electricity was generated. You can create the electricity by burning coal, splitting atoms, or having gerbils run in cages; it simply doesn't matter. And that, in the long term, is the key reason that I believe electricity to be critical.
• Emerging economies such as China and India, who are still developing their infrastructures, are surely looking at how to leapfrog an oil-based infrastructure. Think about what happened with telecommunications in developing countries: most of the 3rd world bypassed land-line telephones and went straight to cellular networks. It is my belief (and worry) that countries like India and China will do a similar leap-frog with transportation, and deploy an electrical infrastructure in their countries before we do in ours. I say "worry" not because I think this would be a bad thing for them; on the contrary, it would be wonderful, and I believe they are quite capable of doing it. I say "worry" because I worry that the United States will be a follower, not a leader. The leading wind companies today are in Denmark. The leading solar companies are Chinese. Given what a huge part of the world economy transportation and transportation infrastructure is, it would be a shame for the US to be anything other than a leader in electrified transportation, but I worry that this is in fact the direction we are headed.
• The whole debate about off-shore drilling completely misses the point. We are going to end up drilling, there's no way for us to avoid it (although frankly, I'd rather wait to do it until after we've finished draining the Saudi/Venezualan/Iranian oil...). So score one for the republicans. But anyone who thinks that drilling will solve anything - especially prices at the pump - is delusional. Demand is growing so fast and the pace of new discoveries is so slow that any incremental supply provided by coastal or ANWR oil will simply help to meet that demand, not provide any of the supply cushion that would be necessary for prices to actually fall. President Bush has said we are addicted to oil. He's right. But the answer to addiction is not to find lower cost drugs or to get more drugs. It's to figure out how to diversify so that you don't have a single critical-source dependency.
  

Merit pay for teachers

I was listening to a discussion on the radio yesterday about the pros and cons of merit pay for teachers. I think that much of the conversation missed the point, which is precisely the sort of thing that motivates me to post here.

The usual debate about merit pay seems to typically include the following arguments.

In favor of merit pay:

• Not all teachers are the same; we should be paying teachers more if they are more effective, and paying less (and removing from the system) teachers who are not effective.
• We want to attract good teachers by showing that they can advance and earn more money by being more effective.
• We want to provide incentives for teachers to go the extra mile with their students by having rewards for it. Absent this, the motivated teacher and the teacher who does the bare minimum get paid the same, which is a strong dis-incentive to put in the extra effort.
  

...and against:

• There is no strictly objective/unbiased way to measure teacher effectiveness.
• Using test scores (or improvement in test scores) has a variety of negative unintended consequences, including teacher cheating, teaching to the test (and all of its related issues, which I won't go into here), and attracting teachers to the best students at the expense of the needy students (if overall test scores are the metric) or to the needy students at the expense of the best students (if test score improvement is the metric).
• Classes have wide variances in student achievement, readiness to learn, socio-economic status, behavioral issues, learning disabilities, etc.
• Merit pay hurts morale and teamwork among teachers because they are aware of differences in pay and because they are competing for a larger share of a fixed budget in what is essentially a zero-sum game (i.e., one teacher's merit pay increase decreases the remaining pool for other teachers, thus it comes out of those other teachers' pockets.)
  
• No principal can spend enough time in each classroom to truly see how well the teachers are actually doing.
• Merit pay "just doesn't work" for teaching: teaching is somehow different from other professions. (On caller on the radio show compared them to physicians and made the point that we don't have merit pay for physicians for similar reasons.)
  

I have been thinking about this a lot over the past few days, and I simply cannot persuade myself that the "against" arguments - though more numerous - outweigh the "for" arguments. In particular, while I think the "against" arguments raise good and important issues - not to be brushed aside - I think none are insurmountable, nor are they sufficient to dissuade me that merit pay is a good idea.

The biggest objection boils down to the lack of strictly objective/unbiased mechanisms for evaluating teacher performance without having the unintended consequences (mentioned above) of things like test scores. This objection is completely accurate, but I think it misses the point. It is letting the perfect be the enemy of the good. There isn't a workplace in the world that evaluates employee performance, where employees are professionals who must exercise professional judgment (i.e., not simply assembling widgets on an assembly line) that is strictly objective, and yet almost every such professional environment evaluates employee performance successfully, if imperfectly. If you go into any such environment - including schools - and ask employees to identify the stars and the dead weight, and you will inevitably find extreme consistency in the answers you get. This is one reason that many workplaces employ 360-degree feedback as part of the evaluation process. If the employees themselves can do this with such a high degree of consistency, then clearly evaluation is possible, even if it is imperfect.

In fact, I believe that an imperfect, subjective evaluation is superior to a strict "objective" evaluation because with no flexibility, no room for subjectivity, there is also no room to recognize outstanding performance or innovation that is outside of the bounds of what the "objective" metric measures. Stated another way: principals are professionals. We as parents make a big deal about good principals vs. bad principals, we are clearly evaluating them, and we are expecting them to make a difference in their schools and to use their judgment in doing so. One of the most critical aspects of a principal's professional judgment is to decide how the teachers in their school are doing. So we are explicitly paying a principal to evaluate teachers - why would we want to then make that evaluation meaningless by refusing to let that evaluation feed back into financial rewards?

I should also note that evaluations - including peer evaluations like this - are used quite successfully in many private sector workplaces without negatively affecting teamwork or morale, so I see no reason to suspect that it would suffer that fate in schools.

The argument against the use of test scores also misses the point for similar reasons. If classroom test scores (or improvement in scores) were the only metrics, then indeed it would be gamed by teachers and schools would suffer the unintended consequences described above. But this is where evaluation requires less mechanical (yikes - this means potentially imperfect and, gasp, subjective!) evaluation metrics. Goals should be set against situations. The goals for a teacher in a gifted students class absolutely should be different than the goals for a teacher in an inner-city classroom of troubled students who are reading 3 grades below grade level. It is crazy to suggest that simple test scores work as a metric for both environments, but they can and should be part of the picture. The former will - among other goals - be looking for a modest improvement in already good test scores, while the latter is doing great if they can improve scores to something closer to expectations.

And let me quickly dispense with the notion that merit pay "just doesn't work for teachers". First of all, this is an assertion without evidence to suggest why teachers are different, and why that unidentified difference is incompatible with pay-for-performance. And the analogy with professionals such as physicians fails because they do have merit pay: the good physicians get lots of referrals (or positions at hospitals etc.), and their business grows. The bad physicians get lawsuits.

Now just because I believe that merit pay makes sense does not mean that any merit pay plan makes sense. I believe that there are 2 ingredients to successful merit pay:

• The objection above that principals do not spend enough time in classrooms is a true danger: to successfully have merit pay, a school must ensure that there is enough time for principals (and other teachers, parents, and even students) to observe and evaluate (and give feedback on) teacher performance. And it is critical to calibrate goals for each teacher based on that teacher's situation. We don't want to penalize teachers for taking harder challenges, nor reward teachers who take on "easy" classes. Test scores are certainly a piece of this, but must not be the only factor in evaluations.
  
• Money must actually be available for superior teachers. My personal opinion on this is that it is a mistake to modify salary based on performance, primarily due to the long-term impact that a "good" evaluation year or a "bad" evaluation year can have on a teacher's subsequent pay. Rather, there should be an annual bonus pool, and evaluations should lead to bonus drawn from that pool. Each year's performance would determine that year's bonus; at the start of the next year, all teachers would be back at the same starting point, with an equal chance at that year's bonus. But whether done by salary or by bonus, school districts cannot implement merit pay without actually funding it.
  

I believe that if these two issues are successfully addressed, then teachers have nothing to fear and even much to gain from merit pay.

The presidential tickets

I watched Sarah Palin's speech last night. I agree with her on some issues, disagree on others, but overall I thought she gave a great speech, is clearly comfortable in her skin, and knows what she stands for.

I think this is going to be an interesting race. We have an interesting matchup. None of the candidates is scary (assuming you ignore the blogosphere's various scare-tactic rumors). Palin is inexperienced, Obama is inexperienced. McCain is experienced, Biden is experienced (although I confess I find Biden to be singularly uninspiring.) 3 senators, who are notoriously bad at executive skills, and one governor, which is historically the best job to have prior to being president. Palin seems to have a bit of a history of holding grudges against those who cross her politically, which I believe to be one of the big problems with the current Bush administration, and that gives me a little pause, especially since her politics are a lot more right-wing than I am generally comfortable with.

I think Obama is the best "leader" of the bunch, in terms of sheer charisma, followed by Palin. I trust McCain more on foreign policy, frankly. He's stuck to his guns on Iraq, and whether or not you think the war was a mistake, the fact is that security has been improving and that's a good thing we should be building on.

I confess that I have not yet made up my mind for whom I'm going to vote. Usually it's a no-brainer for me - in most elections, the prospect of one candidate's presidency is so frightening that I vote for the other candidate. But in this one nobody scares me at that level. It's about policy and philosophy, and with both sides there are policies where I say "right on" and policies where I shake my head in bewilderment as to what on earth they're thinking.

Which is how it should be. I have to make a real choice based on real issues. I'm looking forward to it.

Conscientious Objection Proposal

I've posted before about the collision between conscience and one's job, specifically about the rights of pharmacists to refuse to fill "objectionable" prescriptions. My commentary was primarily about a Washington State controversy with regards to pharmacists (which has since been resolved with the ruling that a pharmacist may refuse to fill a prescription if they can find a coworker who is willing to do so; otherwise, they must fill it). Now, however, there is a proposal to codify the conscience objection at a national level and more broadly than just physicians.

I won't rehash the arguments I made in my original post (though I still believe them to be valid), but I will add a few additional observations.

First, there is a distinction between what you choose to do as an individual, and what your employer chooses to offer. My McDonalds analogy in my earlier post is an example of this; I heard an even better anology on the radio today, saying that if you volunteer for the military, you can't say you object to the war in Iraq but not to the war in Afghanistan. If you object to the war, you have the option to not sign up for the military. But once you sign up, you don't get to decide in which aspects you will and will not participate.

Specifically, it is the employer's policy that prevails. If you are self-employed, super - you can make whatever decisions you like about what services you will and will not offer. But if you are employed, then by definition policies around services are the decision of the employer, not the employee. If you cannot abide by their policy, then there is no reason to offer job protection for you. Freedom of speech and freedom of religion are guaranteed by the government, but only apply as far as the government goes; private organizations (among other exceptions) have always had wide latitude to impose constraints on expression and practices that happen while people are on the job. This point was implicit in my original post, but I think it is worth making explicit the key underlying principle to my analogy.

The second observation is that we have long recognized limits on the practice of religion, the most notable of which is that one's freedom to practice religion stops at the point that it infringes on another's similar freedom. Doctors, pharmacists, etc., are there to service their customers; it is one thing for a doctor or pharmacist to express their objections to a particular practice or methodology, but if it is a service that their employer offers and expects of that particular employee, then the decision simply is not theirs to make. It is the patient's and solely the patient's decision. The employer can, of course, decide what services are on its menu, but it is untenable to require that all employers allow individual employees to make up their own individual deviations.

Finally, a key point that is missing in the Bush proposal seems to be any definition of what is and is not a valid objection of conscience. To pick a provocative example, Christian Identity is a splinter sect of Christianity with many racist adherants. If they were to interpret their faith to require different standards of care for black patients compared to white patients, would employers have to accomodate that? In my reading of the proposed rule, they would. I believe (hope?) that such accomodation would be abhorrant to all rational people, but as I understand the policy, it would allow for arbitrary declarations of moral objection. It would have to, actually: the basis of the proposed rule is explicitly grounded in a person's moral principles, and the first amendment pretty much requires that government (and courts) stay out of questions of validity of one religious view vs. another. Given that, it seems to me that anybody could claim any arbitrary objection that they wanted, and there would be no mechanism for challenging that.

That is clearly broken.

Electrification of transportation

I've been meaning for a while to write a post describing my belief that the long-term replacement for gasoline/diesel in transportation (particularly automobiles) can ultimately only be electricity. (Trains, of course, are already largely electric.) The core of my argument is not environmental or efficiency or cost, but rather fungibility. Specifically: electricity can be made from a wide variety of sources, and that mix can shift fluidly without any retrofit required. You don't need to do anything to your television when your electric utility adds wind power, or fires up a coal-based power plant when there isn't enough water behind the dam. Your TV just knows that it's getting juice and is indifferent to how it is produced.

Andy Grove (former CEO of Intel) has just written an excellent article making this very point in great detail. He's approaching it from a policy point of view and figuring out how to make it happen, whereas I'm simply making a long-term prediction about where I believe the technology will go, but we're both coming at it from essentially the same observation that the fungibility is key. I encourage you to click the link and read it.

I'll also add that electric engines have several advantages over internal combustion engines (ICE). They can offer greater torque (great for acceleration - this is why the fine folks at Tesla Motors realized that an all-electric car makes a very nice sports car) over a wide range of RPMs. They are more efficient - often well north of 50%, whereas a very efficient ICE is doing well if it's getting above 20%. And they are generally quite reliable, having relatively few parts compared to an ICE. These advantages, however, have historically been insufficient to overcome electric engines Achiles heel: carrying enough electrical energy to go long distances, and quick recharge times. But with the progress currently being made in battery technology and ultracapacitors, I believe that this hurdle will eventually be crossed.

See? I told you the airlines hate their customers

Ryannair is apparently canceling bookings made by customers on 3rd-party sites. Smart, real smart.

I have no sympathy for airlines with financial problems if this the kind of nonsense in which they engage.

OK, I'm no lawyer...

...but it appears that my earlier commentary about executive privilege was correct. My assertion was that executive privilege may or may not apply, but that's something you assert in response to specific questions rather than as an excuse for not showing up. Today, a judge said pretty much the same thing.

Oil Speculation

Everybody is complaining about oil prices. Congress, of course, feels it is their job to do something about it (why leads to inane proposals such as the gas tax holiday that I have written about before).

Republicans, predictably, are demanding more drilling, which doesn't really do anything about prices in the near term, and almost certainly won't do anything in the long term: by the time that oil reaches the market in 8-10 years, demand will have grown to the point where that capacity won't affect the supply/demand balance, it will simply help meet the overall appetite. It's also not really a solution to the extent that it only extends our dependency on oil overall. (My personal opinion is that we should use all of the oil from the Middle East and Africa and save our own oil for last. But I digress...) But at least the Republican proposal is somewhat rational in that it recognizes that prices are basically set by supply/demand and attempts to affect the supply side.

The Democrats, on the other hand, are blaming rampant speculation for the run-up in oil prices. They're almost certainly right about this. But the problem is that they want to do something about it, to "solve" the problem. And on this point, they miss the point altogether.

Speculation is not a "problem to solve." It is healthy, and necessary to the functioning of markets. Yes, it leads to bubbles (and I believe oil prices are in a bubble right now), but when the bubble pops it is the speculators who get punished. "Speculation" is nothing more than investment with a dirty-sounding name. But without risk takers who are betting on the price, the markets would be less liquid and less likely to arrive at the "right" price over time. Speculation is fundamental to almost all investments - holding any share of stock for the long term is a form of speculation, and we never refer to that as being a bad thing.

I have no problem with keeping oil commodity trading open and appropriately regulated, but I haven't heard of any true problems with these markets in this regard. But the Democrat's response here seems to be that because a (basically) functioning market is producing prices that we don't like, that something must be wrong with it and done to "fix" it. Remember how well price controls worked for the problem of inflation? The idea of reigning in bogeyman "speculators" has me more scared than the price of oil itself.

China

I've posted previously on my thoughts about the Chinese government. Watching their conduct recently with respect to Zimbabwe and the indictment of Sudan's president just confirms for me: the Chinese regime operates on its own short-term interests alone; ethics and morality simply are not a factor in their behavior.

Their desire for the principle of absolute unquestioned sovereignty (so that they themselves do not get questioned) is such that I firmly believe that if the Nazis were to come to power today and had a supply of a vital commodity such as oil or iron ore or similar, that the Chinese would happily manufacture and trade Zyklon-B in exchange.

Supreme Court ruling on Gitmo Detainees

A few days ago the Supreme Court ruled that detainees in Guantanamo Bay have the right to challenge their detentions in US civilian courts.

I am not wild about this decision because I believe that it will result in some frivolous legal proceedings, and could result in the release of true terrorists. Nevertheless, I believe it is the correct decision for a variety of reasons (all with the usual caveats that I'm not a lawyer):

• We have two legal frameworks under which our government operates: criminal and military. We’ve survived 230 years with these two, and have never had any real problem with putting people under one jurisdiction or the other. I do not see why this system suddenly needs to break down. The detainees are either prisoners of war (whether they are subject to Geneva convention protection is debatable), or they are criminals. Bush is trying to have it both ways: treating this as a military war in every single respect but for one, namely what we call the enemies that we capture. If it walks like a duck and quacks like a duck…
• Many people have made the argument that because the detainees are not US citizens that they do not have constitutional rights. This is a bad argument: the rights guaranteed in the constitution have never been limited to citizens. Rather, those rights are limitations on what our government can do, how it can treat people, so it applies to official acts of the government even extra-territorially. Again, that’s a criminal statement which is probably void if in a military context, but Bush seems to be arguing against the latter despite all evidence to the contrary. The fact that terrorists don’t wear uniforms and target civilians may exempt them from Geneva conventions, but it doesn’t make their actions any less “military,” especially if that’s what we respond with.
• Consider the case if the decision had gone the other way. Suppose I firebomb a house. I’m guilty of arson (and probably a few other crimes), but I’m afforded various legal protections before I can be sent to jail for that. If the decision had gone the other way, then if Bush decided that my act was not mere arson but “terrorism”, then according to their logic, they could declare me an unlawful combatant or terrorist and lock me up indefinitely. And there’s nothing I could do about it. This isn't just a hypothetical, this is exactly what they did with Jose Padilla, who was a US citizen detained on American soil. The fact that the president is an honorable person who wouldn’t frivolously do this is immaterial – it’s not a power that our constitution grants, and the framers of our constitution were deliberately (and justifiably) wary of granting unchecked powers to any position and simply trusting that it wouldn't be abused.
• Another argument in favor of holding the detainees is the historical precedent of holding prisoners of war without any rights to challenge their holding until the end of hostilities. The problem here is that while it is a war in just about every sense of the word, it also is not at all a war because there is no central unified enemy: we’re fighting a bunch of independent ideologues. Yes, some band together to form one group or another (Al Queda, the Taliban, Hamas, Hizbullah, Al Queda in Iraq), but that’s the point: even if you get rid of Bin Laden, Al Queda doesn’t go away or cease hostilities. To the degree that individuals or small autonomous groups are acting on their own, there is no peace treaty, the very notion of “end of hostilities” makes no sense. So we should admit what this is: we're holding people that we suspect are dangerous. This may seem to contradict my earlier assertion that this is truly military, but it actually supports the idea that these guys are either prisoners of war or criminals, or even some blend of the two, but just because they don't fall neatly into one or the other doesn't mean that they fall in some in-between world that is neither.
• One of the core principles of America is that we do not punish innocent people. While we can be sure that many Gitmo inmates are in fact bad, bad, bad, we also know of quite a number of people who were basically innocent of terrorism, who were in the wrong place at the wrong time or who committed the “terrorism” of driving a car for Bin Laden (for example). As a nation we should find the idea of delaying indefinitely a determination of guilt or innocence abhorrent and reprehensible.
• I’m sure the detainees are dangerous. So are murderers. And we occasionally have to release a murderer because they’ve served their time or because we couldn’t prove their guilt. And our society has accepted this imperfection as the price of being a just society. But most of the time, if we’re worried about that criminal, we’re able to demonstrate to the court that they are indeed a continued threat and are able to keep them detained. Why do we think we wouldn’t be able to do that if someone challenged their detention? In other words, if we think that giving them Habeas Corpus somehow will lead to a lot of them being freed, then it seems to me that we’re holding them on far flimsier evidence than we should be. Conversely, if we really have good reason to think they’re as dangerous as we’ve been saying they are, then heck – “bring it on.” Let them challenge their detentions, show the judge (secretly, if necessary) why we think they’re baddies, and watch how quickly the courts affirm that they are indeed a threat and can remain locked up. Frankly, I don't have a problem with military commissions (including the less protective rules of evidence) as opposed to civilian courts because I don't think these are ordinary criminals, nor do I think that ordinary jurisdiction applies. But we do need to have some sort of legal process here.
  

In short, I think that the biggest problem with the way that we are holding these detainees is that we are making it up as we go along. (Indeed, the Seattle Times had a story on just this topic today.) Our nation is built upon a framework of laws and checks and balances precisely to avoid this sort of legal improvisation. There have indeed been times when we have had to work outside of that framework, but in the past presidents have explicitly suspended habeas corpus; our current president has decided not to do this, and this to me means that he is trying to have it both ways.

A self-fulfilling prophecy in reverse?

So Hillary Clinton has finally conceded (sort of) that Obama won the nomination. And in doing so, she has proven that her failure to be nominated was the right decision.

Allow me to explain, and to first disclaim that I didn't particularly care which of these candidates won the nomination.

It's been obvious to most observers for a while now that Obama's lead was mathematically insurmountable. And yet she stayed in the race well past that point, and despite it's essentially irrefutable logic. I think this showed a disturbing inability to recognize reality and deal with it, instead clinging to an alternate reality despite any inconvenient (yet obvious) evidence to the contrary.

Pretty much all Democrats/liberals (and even most conservatives at this point) point out that Bush's single biggest flaw as a president has been that he has wrapped himself in a bubble and has refused to acknowledge even the most obvious data that is contrary to his world view.

So regardless of whether or not her winning or losing was the right decision by the Democratic primary process, in delaying her recognition of the obvious she has demonstrated quite convincingly (to me, anyway) that she suffers from precisely the same character flaw that Democrats have been railing against (directly or indirectly) in Bush for his entire term.

And thus she has proven that if she were to be elected, she would likely be just like him, only with a different political lens. I.e., she's campaigning on the message that we need to replace Bush, yet she has proven herself to suffer his worst flaw! And thus, in selecting someone else, the Democratic party has created a reverse self-fulfilling prophecy!

More on Airline fees and a-la-carte pricing.

I've posted in the past about airline fees and my recommendations, and lo and behold American Airlines is now taking my advice...sort of.

I think I simply forgot about the fact that *how* you go about this matters as much as going about it. And American Airlines is doing it all wrong, and in the process showing that they hate their customers.

The problem is not that American is charging for checking the first bag. The problem is that they are treating this as a penalty, as a surcharge, as punishment.

Consider two scenarios:

Scenario A: American (or any other airline) announces that they are going "A la carte." Their message to their customers is simple: we're going to keep your cost as low as possible by only charging your for what you need. Our fares (which include fuel, for crying out loud!), are as low as we can make them; you can add to that the services that you want. Each service that you add, whether it is meal service, baggage service, or a cancel/change waiver, is a separate service that we will stand behind independently. Don't like the food you bought? Get your money back. Paid for your golf clubs but they were delayed? We'll rent you a set until we get your clubs to you. If you pay for it, we'll make sure it's right.

Scenario B: American says that you can buy a "low fare" for your flight, but at every turn, whenever you try to do something that a reasonable person might want to do or expect to be included, you have to pay a fee, about which you likely did not know in advance. And even if you pay the fee (for example to check a bag), you get no additional service guarantees with it, you simply take your chances (and you won't get a refund). In fact, you may suffer fees even if you do everything to avoid it, for example if you find that there is insufficient overhead space for your legitimate carry-on bag and are forced to check it. You probably would have been willing to pay more for a ticket that could be changed, but you were never offered any such option because you were simply shown "lowest fares" on the airline website or on travel agency sites such as Expedia or Travelocity, all of which are oriented towards the lowest sticker price possible.

Now I admit that my scenarios are hardly unbiased portraits, but that's because I am biased. Scenario A is McDonalds, where nobody complains about the fact that adding fries to a burger costs more than the burger alone. (And, of course, "value meals" are hardly precluded in this scenario.) Scenario B, which nickels-and-dimes customers is...well, the airlines.

Any legitimate company that seeks to provide value to their customers and make money in the process would naturally implement scenario A; companies that are out to make money however possible but don't give a damn about their customers in the process gravitate towards B as a "revenue optimization" model.

Airlines today are in a really tough spot, and I sympathize with them for that, but unfortunately most of them today are viewing their solution through a Scenario B lens. This is shortsighted on their part, and demonstrates that they simply do not understand their business and what it means to make money by providing value to customers.

Southwest Airlines comes the closest to implementing Scenario A. Southwest Airlines is the only US airline that has consistently made money over the nearly 100 year history of commercial aviation. Am I the only one who thinks that this might not be a coincidence?

Gas Tax Holiday

Hillary Clinton, among a few others, has been proposing the idea of a "gas tax holiday" for the summer due to the high price of gasoline. I will add my voice to the chorus that believes that this is a gimmick at best and a bad idea at worst.

First of all, it won't meaningfully lower the price of gas; the amount of tax on a gasoline is less than the amount prices have been varying of their own accord in the matter of weeks.

More fundamentally, it is a gimmick because the entire premise of the proposal is that governments are responsible for the price of gas and that the price of gas is somehow broken.

While it is of course true that in many countries government has a strong hand in the price of gas, that is only minimally true here. The gas tax is pretty low, and prices are largely determined by the markets. (Verifying that these markets are functioning properly is of course a valid responsibility of the government, but inevitably investigations into manipulation of these markets fails to find anything askew.)

And I'd argue that there is nothing inappropriate about the price of gas. I don't like it, but that doesn't mean that it's inappropriate. It's a commodity with finite supplies, diminishing new finds, and exponentially growing demand. So why should any rational person expect the long term trend on these prices to be anything but up? The price of a barrel of oil is up more than fourfold over the past few years, yet gas is only up 2-3x; that suggests to me that the price of gas is actually pretty reasonable.

I'm thinking that oil is above its "intrinsic" price right now because of speculation, fears of supply disruption, and (of course) the falling dollar; I'm not a sophisticated enough investor to know what the "right" price should be, but it's not $20 a barrel any more, and it will trend upward over time. But markets are far more efficient at finding the right price than any government attempts to guide it.

The market adjusts for the high price of gas in other ways as well: SUV sales are plummeting, hybrid sales are soaring, and alternative energy investments that do not make sense when oil is at $60 a barrel make a lot of sense at $90, $100, or higher. So the economy will almost certainly do exactly what it did during the energy crisis of the 1970s: it will get a heckuva lot more efficient, and the amount of energy required per unit of GDP produced will fall. And this helps keep us competitive and insulates us from the inevitable subsequent increases down the road.

Even if we were to ignore all of this and take for granted that high gas prices are a problem to solve, I also suspect that this "gas tax holiday" would actually exacerbate prices. After all, if it actually were to achieve its stated goal of lowering prices in a meaningful way, the law of supply and demand implies that consumption would go up. If consumption goes up, the price - especially given continued tight supplies and refining bottlenecks - will go right back up. So to be effective, the tax holiday must not lower prices by a meaningful amount. Which means that the tax holiday can only be meaningful if it fails to be meaningful. Brilliant.

So we have a solution proposed that would actually fail to solve our problem, but it turns out that the problem is not actually a problem. "Bad solutions to problems that don't exist" is probably the most distinctive hallmark of bad ideas.

As a postscript, I think it's particularly amusing that Hillary is using the term "elite" as a dismissive insult in reference to the fact that economists are nearly unanimous that the gas tax holiday idea is silly. I understand that politics is politics, but I'd at least hope politicians wouldn't be so naked about their political positioning.

Intellectual property and dumb business models

My wife and I attended a charity auction a few weeks ago, and they had a photographer there capturing the well-dressed couples. We posed for a picture, and a few days ago went online to view them. Liking them, we decided to order some, and we requested to purchase the images electronically, since we mostly view images on the computer these days rather than on a wall.

No dice. The photographer will sell us low resolution digital images for the price of a print, or a print, but will not part with the high resolution images that we want. His reasoning is that if he sells us the high-resolution images, we can go to Costco (or use our own photo printer) to make our own prints.

While he's absolutely correct about this, he is showing the same short-sightedness that the recording industry has displayed with regard to copyright protection. In the same way that the recording industry incorrectly views its business as selling CDs rather than as selling music, this photographer views his business as selling prints, not selling images. So instead of selling to customers what they want to buy, he restricts them from that very thing.

If he were smart, he would offer two options: sell the print or low-resolution digital image for the $20 or so he would charge. Or, for something more - say, $25 or $30 - sell the high-resolution image, including a license to reproduce for personal use.

In other words, his copyright has value. He's currently using the copyright in a restrictive capacity, when he could instead be monetizing the value he holds in it. If he sold a version of the digital images with a license to reproduce, he'd continue to hold his copyright to the work, but he'd be making money from the value of the copyright. And most importantly, he'd be selling to his customers what they want to buy.

A few short years ago, this was not practical - photographers were in fact in the print business. Besides the fact that digital images were not possible or desired, photographers typically had high expenses as they had to print out every picture even though they would only sell a fraction of those prints. Today, however, these costs have dropped to zero as the only images they need to print are the ones that they sell. This particular photographer is using an antiquated model; he is using 21st technology to take the pictures, he should bring his business into the 21st century as well.

Bush's greenhouse gas proposal

A friend pointed me to this Wall Street Journal opinion that defends Bush's recent proposal to stop the growth in greenhouse gas (GHG) emissions by 2025. The gist of the article is that anything more is unrealistic, that all of the goals being touted by environmentalists are unachievable.

While the Journal is absolutely right, something about this opinion bothered me, and after thinking about it overnight, I've realized what it is.

There are 3 key questions, I think, about global warming:
a) Is it real? (The main scientific question, best answered by scientists from data, not politicians or pundits)
b) IF it’s real, is it bad? (Combination of scientific/policy question)
c) IF it’s real AND it’s bad, what can or should we do about it? (Strictly policy)

There’s all sorts of room for debate on all of these questions - more on c than b, more on b than a, but room indeed on all 3. But I think the debate on these questions is actually somewhat beside the point.

The fact that Bush is putting out any sort of greenhouse gas goal means that he must be saying “yes” to (a) and (b); otherwise the only explanation is that it’s completely cynical ploy on his part to try to appear to be doing something without actually doing anything. After all, if he says “no” to either (a) or (b) then there’s no point in making any proposal to limit GHGs at all.

So if we give him the benefit of the doubt on this, then his proposal must logically be his answer for (c). In which case he is rightfully assailed for not doing anything meaningful. I.e., it’s doing something that we know will be pointless rather than doing something that we know will be difficult.

He didn’t claim that more aggressive cuts are unnecessary or futile, or that other approaches (e.g., GHG sequestration) make more sense, either of which could potentially be valid scientifically justifiable arguments. He simply said it would be too hard (and the WSJ agrees). He is almost certainly correct on this, but to me it’s akin to Kennedy challenging the nation to have a design for an unmanned ship that could go into lunar orbit by 2020. Maybe we can’t hit something more aggressive, but we won’t know if we don’t try.

We have a president who for 7 years has steadfastly refused to do anything about global warming. For reasons that are inexplicable to me, he has decided with less than a year left in office to put forth a proposal that global warming activists hate, and that global warming deniers hate as well (because it's sheer existence is an acknowledgment that global warming is real).

My friend (a self-described conservative) who pointed me to the WSJ article, thinks that my "cynical ploy" explanation above is accurate. I don't know if it is or isn't, but I can't see what he hopes to gain with this proposal, but I think it would have actually been far more honest for him to simply say “whether or not it's real, there’s nothing we can do about it so why bother.”

One more reason to hate Digital Rights Management (DRM)

This news from Microsoft yesterday: they're shutting down their PlaysForSure servers. What does this mean? It means that if you bought music from the MSN Music store, then whatever machines are currently authorized to play those songs are the only machines that will ever be able to play those songs. Of course, computers become obsolete approximately 3 hours after you purchase them, so this means that in the near future when you've replaced your computers, you will no longer be able to play the songs you spent good money to purchase.

So let's see: you try to do the right thing by buying music, and the industry screws you over for it.

I'm an honest consumer. I try to do the right thing. I buy my music (all of it, these days, from Amazon, where it has no DRM). But enforcement of anti-piracy technology like DRM is an injustice to the very people that the industry should be wooing.

Further erosion of freedom in the name of "security"

A few years ago I flew a small airplane into Avey airport in Washington state, which has the interesting property of straddling the US-Canadian border. I flew in from the south, landing to the north, and thus crossed the border halfway through my landing roll. There is a street adjacent to the airfield, with a border station on it. I taxied back to the midpoint of the runway where there is an area to park, shut down the airplane and climbed out. A border patrol agent was crossing the street from the crossing, so I waved him down and asked him what formalities were needed.

Border Patrol Agent: Did you fly from the US?
Me: Yes
BPA: Are you landing anywhere outside of the US?
Me: Other than rolling down the runway, no.
BPA: When you take off, are you going back to the US?
Me: Yes
BPA: Then I can't even talk to you. [I presume he meant in an official capacity, rather than on a personal level]

And off I went. What a great experience, and it reminded me of one of the great freedoms we enjoy in the United States: the right to be left alone. Absent a warrant or reasonable suspicion of wrongdoing, the government cannot stop you, question you, ask for papers, or otherwise make you justify anything you are doing. It's something we largely take for granted. In many other countries, one must endure random roadblocks, identity paper checks, and other arbitrary intrusions at the whim of the government, but not here.

Then this morning I saw a story in the newspaper about checks that the border patrol is now conducting spot checks on ferries in the San Juan Islands. The San Juans are up near the Canadian border, and conduct international runs from Canada to the US, so on those runs it is entirely appropriate for the border patrol to do more or less whatever border enforcement it deems necessary.

But what is insidious about the new spot checks is that they are being conducted on routes which are entirely domestic - in other words, where there is no border being crossed and where the Border Patrol has no jurisdiction. The CBP even acknowledges as much: they acknowledge that they cannot do anything when a person refuses to answer their questions, but I suppose that enough people are either not aware of their rights or too timid to stand up to people in uniform, and as a result the net effect is that they get cooperation. Nevertheless, these people are detained for a period of time, and license plate numbers are run, which amounts in my opinion to illegal domestic surveillance and illegal detention.

This is, of course, being done in the name of "national security" and "anti-terrorism." Ahh, the evils that can be justified by those words. We should never let our fears lead us into abdicating our rights, for if we do then we have proven that we don't deserve those rights. It is a slippery slope.

Adding insult to injury, this program is leading not to the arrest of terrorists, which would at least mitigate (although not excuse!) this encroachment on our freedom, but rather to the arrest of illegal aliens. I have no problem with arresting illegal aliens, they are breaking the law and do not deserve sanctuary for having done so. But to trample our civil rights in the name of security as a ruse for over aggressive enforcement of immigration rules should shock every American.

Cuba

While I have no love for the Cuban regime, I have also long thought that the US policy towards the island has been, well, stupid. It was an absolutely reasonable strategy to try after the revolution, and perhaps for another 10 years, but after 20, 30, 40 years, it should have been clear that it simply wasn't working. It seems to me that we've dogmatically held on to our policy of isolating Cuba not because it achieves our objectives (it hasn't met any that I can tell), but because it gives the illusion of doing something useful. In other words, I think it's more about satisfying Miami voters and feeling good about not supporting the regime than it is about actually making life better for the Cuban people.

But an interesting thing is happening in Cuba right now: the government is opening up a bit, removing many of the arbitrary and cruel restrictions it has kept on its people with regard to consumer electronics.

So now that ordinary Cubans who happen to have enough money to buy a DVD player (which, I suppose, includes no "ordinary" Cubans), all is well with Cuba, right? Well, no, of course not, not even close. Cuba is still ruled by an oppressive abusive dictatorship, and there is still no political freedom and the economy is still a disaster.

But the opening up on consumer electronics - however minor - is highly significant for two reasons. The first reason is that I have never seen a government open up just a little; small freedoms inevitably are followed by bigger freedoms - trickles become floods. Two examples I offer here are China and East Germany.

The second reason I think it is significant is that after 50 years of an ineffectual policy towards Cuba, the ball is suddenly in our court - there is suddenly a change on the island. It's not due to our policies, but it's a change nevertheless. How will our policy towards Cuba change in response? Will it change, to encourage further liberalization? Or will we continue to cling to the blind dogmatic policies of the past?

Paper or Plastic?

Seattle is proposing the first-in-the-nation attack on bags at grocery stores: a $0.20 fee for using paper OR plastic rather than bringing your own bag to the store.

I'm normally quite a skeptic of government trying to mandate well-intentioned outcomes, and question whether government (rather than the market) should be the arbiter of the best way to determine things like this. But I also believe that sometimes it is only the government can make a negative externality explicit, and I think that this sort of policy is the right way to achieve it. The fee is optional (you don't have to pay it if you just bring your own bag), and they're providing bags for the poor to avoid the unintended consequence of taxing the people who can least afford it.

Governments should not mandate free-choice behavior like this. But setting up incentives that make doing the "right" thing a natural choice? Bring it on!

Why $100+/Barrel Oil is Good

A lot of people are complaining about the high price of oil lately. Frankly, I don't have a ton of sympathy. Oil has been quite cheap - artificially so, in my opinion - for a long time; for once it feels like it is finally priced at something that captures it's true cost. It shouldn't surprise anybody that oil is expensive. After all, it is a finite resource in a world of increasing demand and all the "easy" sources have been drained so each incremental barrel is more difficult to find and extract. I can't say whether or not $102 (today's closing price) per barrel is the "right" price (although markets tend to be pretty good at finding the"right" price), but it's probably in the right ballpark and I don't see it going down anytime soon.

Our entire economy is dependent on oil, so how can expensive oil possibly be a good thing? As a country, we've been moaning for a long time about our "addiction to foreign oil" and talking about things like "energy independence." And usually when politicians say it, they are frustrated about their inability to do anything about it. Well, of course they're frustrated: economies respond to market forces, not government dictates. We haven't weaned ourself from foreign oil because it's been so cheap compared to other energy sources. The only way a government can alter our course is to alter that dynamic, typically through things like tax policy, which is often quite dangerous to political careers (even if it is the right thing to do). And besides, no rational government wants to harm it's domestic industries by raising its costs above that of its rivals.

But the great thing about $100 oil is that it is a market-imposed price, and it affects all players equally. This results in two very good things. First, America gets more efficient with its energy use. This is why energy per dollar of GDP has dropped rather dramatically in the late 70's/80's. (This obviously has benefits for greenhouse gas emissions as well). The second good thing is that it makes alternative sources of energy far more economically viable. Entrepreneurs are naturally reluctant to enter a market that is artificially sustained by government policies, since such policies are subject to change on short notice. But a market that is defined more organically - as the current one is - and which is not poised to change (as a finite resource with increasing demand, it is hard to see oil prices dropping dramatically for any sustained period of time) will attract entrepreneurs and innovators who see a more sustainable positive environment.

In other words, $100 oil could be the best thing that ever happened to our dependence on foreign oil: it could be the very thing that helps us to kick the habit.

Another great post about the death of the traditional music biz.

Jeff Price mirrors other blogs in writing about how the old model for the music business is dead. It's too bad that the major labels haven't figured this out yet.

Predictably Irrational

On a friend's recommendation, I just read Predictably Irrational. I know that this is intended to be a political blog and this is not a political book, but I think it's still a fascinating exploration into why we do things that we do - especially since so much of what we humans do is fundamentally not rational.

It's a quick read, I highly recommend it.

Tibet, China, and the Olympics

The Chinese government isn't entirely bad. After all, over the past two decades they've orchestrated what is perhaps the greatest economic rise in history, lifting more people out of poverty more quickly than ever before. And it has certainly opened up quite a bit over this period as well. Both of these trends should be applauded and supported.

But unfortunately, not only do the ends not justify the means, but I believe that the overall tally of evils that the Chinese government commits greatly outweighs the benefits it provides. The environment in China is toxic. The government is corrupt, authoritarian, abusive of the peoples' basic freedoms, utterly indifferent to the evils of other countries when it suits their needs (more on this below), and it behaves like an immature paranoid petulant child on the world stage whenever there is any issue that affects its pride.

The upcoming Beijing Olympics I think epitomize this latter point. The Chinese government has made the Olympics a centerpiece of national pride more than any other host nation that I can recall. Good for them, and I actually wish them well for a great event.

But it is in this context that I watch what has been going on in Tibet. I think the government has exposed its Achilles heel. It is determined to show a new, open face to the world for the Olympics. And it is determined to orchestrate the Olympics to go flawlessly - and without a whiff of anything embarrassing.

Therein, I believe, lies the dilemma for the Chinese government, which I believe activists for the myriad causes that have complaints about the Chinese government would be wise to exploit. If they protest in any sort of visible way, China must either respond or not. If it responds with openness (as it has promised), then it "suffers" the embarrassment of the world seeing the protest. (Of course, any legitimate government should have no fear of visible dissent, but this is one reason why I believe that the government behaves like an immature child.) And if it responds with a clampdown - as it has done in Tibet over the past few weeks - it reveals its true colors as a brutal regime whose claim to legitimacy is so tenuous that it cannot suffer dissent. Either case would be a PR nightmare for the government, and thus a win for the activists. All they need to do is lie low and avoid being rounded up until the event.

One more thing about why I think the Chinese government needs to "grow up." The Chinese government demands to be treated with the respect on the world stage that is given to other major powers and is exceptionally thin skinned when it feels that respect is not forthcoming. But among other things, maturity means understanding that respect is something that must be earned. For example, China has had ample opportunity with North Korea and Sudan to demonstrate that it is worthy of great-nation status, and has all but abrogated any responsibility - despite it's unique position to do so - to help to reduce the unmitigated evil that these two countries inflict upon their populations; quite the contrary, it has been the primary support propping them up. In another example, China tries to have it both ways on the environment: demanding to be treated as a developing nation with regard to carbon emissions, even after surpassing the US. Mark Twain once said "Patriotism is supporting your country all the time, and your government when it deserves it." The same is true for respect. I cannot respect a government that fails to earn that respect.

I've been to China. It is a wonderful country, it has tremendous potential to be a true leader on the world stage. And the government does deserve a lot of credit for the progress the country has made. But it is not enough - more change is needed if it is to truly become the great nation it aspires to be. The Chinese government has made the Olympics a defining moment for the country. I wonder if it will be all for show, or if it will truly become a defining moment.

Fee for your thought?

I've got fees on my mind lately. The news that United Airlines is going to start charging $50 to check two bags certainly struck me as indicative of the whole problem.

It's really this: calling something a "fee" is only legitimate in two circumstances. The first is when it is passing through a charge from a 3rd party. The Sept. 11 security fees on airline tickets, or the service charge to buy a ticket from Expedia or Travelocity would fall in this category. The second is when the fee is charged for a discrete or incremental (and presumably optional) service. Examples here include a corkage fee for bringing your own bottle of wine to a restaurant, or a surcharge for 2nd-day delivery of a package.

Sadly, though, we're seeing a proliferation of all sorts of "fees" that meet neither of these criteria and which are, in my opinion, downright fraudulent and deceptive.

My favorite example of abusive "fees" charged to customers is the "fuel surcharge" that we're seeing applied not only to airline tickets, but also to many other everyday services. Don't get me wrong - with the high cost of fuel, businesses that are fuel dependent need to recover their costs, and there is absolutely nothing wrong with raising prices to do so. But companies are simply t insulting their customers by pretending that this is some "fee". It isn't - it's simply raising prices, but it's fraudulent because it let's the company pretend that they're not actually raising prices (after all, the advertised airfare is unchanged) when, of course, they are. Fuel is critical to the act of flying an airplane. It isn't as though passengers can opt out of using the fuel to get to their destination. The fuel for a flight is part and parcel of the cost of operating the flight. When you are spending $500 on an airline ticket, $200 (or probably more) is going to fuel costs anyhow; what is it about the $20 covered by the "fuel surcharge" that makes it different? Why not simply call this a $300 fare with a $200 fuel surcharge? Calling out a fuel surcharge is like buying bread with a separate "wheat surcharge." If it's an integral part of the cost of the product or service, then there is no excuse for arbitrarily excluding parts of that cost because they make the resulting price inconveniently high. It is an act of deception.

My other favorite example in this vein is the increasing number of hotels that tack on exorbitant "resort fees" for each night of a stay. I would have no problem with this if the fee were tied to usage of "resort facilities" (however defined), but I have yet to see a hotel that actually let you opt out of services as a way to bypass the fee. Wheat in bread.

Which brings me back to the United Airlines baggage policy. As a customer, I'm not wild about the policy, but I can see why they do it, and at least it's honest: you don't have to pay the fee if you don't use the incremental service to which it's tied. Interestingly, United justified the fee by saying that all passengers pay for baggage service in their ticket prices today, but only one in four passengers check two bags, so now they can pay for the incremental cost. This justification would work if they were actually going to call out baggage services as a discrete fee, separate from ticket prices altogether, but they aren't actually doing that.

I actually think that airlines, hotels, and others would be very well served by doing two things: first, break everything out into true a-la-carte pricing. For an airline, this would mean publishing a base fare. Want a better seat? $20 more. Refundable or changeable? $100. Want to check a bag? $25 per bag. Want early boarding? $5. Peanuts and soda? $5. Lobster? $100. Let people create the right options for what they want.

And then create simple packages (discounted, of course, relative to the a-la carte sum total) to provide an incentive for these upgrades. "First class" means you get all of the above options, but anybody who doesn't want all of "first class" could pick and choose what they did want. Maybe there aren't any more first class seats on the airplane, but how hard would it be to load a few more first class meals and extra wine for the folks in coach that are willing to pay for it? This turns a cost-center into a profit center.

Hotels could do the same thing, and for many hotels that have a mix of business customers (who may not make much use of the "resort amenities") and leisure customers that may make sense. But I 'd suggest that hotels would have more luck going entirely in the packaged model: eliminate the damned resort fee and internet access fees and all of that, raise the base room rates by the right amount to cover these costs (and then some), and make it all inclusive, straightforward pricing. Personally, I hate splurging for a hotel that charges $450 a night and find that they want another $16/day for Internet access. As irrational as it sounds, I'd rather spend $500 a night and have it all included, with no nickel and diming. But at least the Internet access is legitimate to break out if the hotel decides to do so - if I don't like the cost, I can choose to forego it (and often do). It's the "resort fee", which I have no way of avoiding, that I find so insulting and disrespectful.

Successful businesses show their customers they care. Hmmm....I guess I shouldn't be surprised to see airlines embracing bogus "fees", should I?