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.