Friday, November 30, 2007

Recession?

Larry Summers in the Financial Times on the increasing probability of recession:

Three months ago it was reasonable to expect that the subprime credit crisis would be a financially significant event but not one that would threaten the overall pattern of economic growth. This is still a possible outcome but no longer the preponderant probability.

Even if necessary changes in policy are implemented, the odds now favour a US recession that slows growth significantly on a global basis. Without stronger policy responses than have been observed to date, moreover, there is the risk that the adverse impacts will be felt for the rest of this decade and beyond.

Several streams of data indicate how much more serious the situation is than was clear a few months ago. First, forward-looking indicators suggest that the housing sector may be in free-fall from what felt like the basement levels of a few months ago. Single family home construction may be down over the next year by as much as half from previous peak levels ... Second, it is now clear that only a small part of the financial distress that must be worked through has yet been faced. On even the most optimistic estimates, the rate of foreclosure will more than double over the next year as rates reset on subprime mortgages and home values fall ... Third, the capacity of the financial system to provide credit in support of new investment on the scale necessary to maintain economic expansion is in increasing doubt.

So Secretary Summers attributes our current predicament to the collapse of the housing bubble; the fact that the contagion has not yet fully propagated through the global financial system; and the continuation of a flight to quality in credit markets, making liquidity scarce just when troubled banks need it most. I agree.

Dr Summers' remedies:

What concrete steps are necessary? First, maintaining demand must be the over-arching macro-economic priority. That means the Fed has to get ahead of the curve and recognize—as the market already has—that levels of the Fed Funds rate that were neutral when the financial system was working normally are quite contractionary today ... Second, policymakers need to articulate a clear strategy addressing the various pressures leading to contractions in credit. Very likely this will involve measures that are non-traditional, given how much of the problem lies outside bank balance sheets ... Third, there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible. The government [directly or indirectly] needs to assure that there is a continuing flow of reasonably priced loans to credit worthy home purchasers.

Summers thus identifies a solution in three parts: More aggressive Fed funds rate lowering; a strategy to reduce portfolio-liquidation pressures (he cites the so-called super conduit, but he is, as I am, skeptical); and a plan to bolster credit for homebuyers.

He concludes:

All of this may not be enough to avert a recession. But it is much more than is under way right now.

Secretary Summers is as astute an observer as anyone, and his policy prescriptions make sense, so what is the hold up?

First, I do not believe that monetary policy, particularly from The Fed's view, is quite so unambiguous. Inflation still looms, not helped by surging oil prices. Moreover, Chairman Bernanke readily makes clear his determination to brutally club long-term inflation, prioritizing a stable price level well before a growing economy (although the market is pricing in a rate cut, and the fact that Wall Street thinks Bernanke is bluffing only forces his hand). The Fed has shown themselves an able steward of the money supply. Chairman Bernanke has a longer term mandate than next quarter's earnings reports, and nothing as-of-yet suggests they won't strike the right balance.

It is also politically risky to start trashing the economy: No one wants to use the R word. While the incumbent party is least likely to diss the product of their own policies, no major candidate has made preventing (or recovering from) an economic downturn part of his or her stump speech. Indeed, the Democrats are still arguing for a more equitable distribution of benefits from the allegedly-booming economy. That talk will end, as will calls to lower the deficit and raise taxes (both politically harder and economically less wise), if the economy gets ugly.

Methods to bolster credit and protect portfolios from a fire sale have the right intention, but it is not clear to me what steps would best realize that goal. We do not want to continue to fuel an asset bubble. For example, Florida is considering laws to implement property tax portability, allowing homeowners to take their tax liability with them when they move homes. This sounds like a boon to consumers, but the policy will have the unintended effect of maintaining Florida's absurd home prices. It should not be surprising that homebuilders are the bill's largest supporters.

We also do not want to create a moral hazard by bailing out imprudent investments. If Wall Street can coordinate a rescue fund amongst themselves—and if anyone can arrange that, its Secretary Paulson—the lack of government involvement mitigates that risk. But the details on that plan are meager; Dr Summers is correct to call for a clear explanation.

Nor do we want a knee-jerk painting of new legislation across the regulatory landscape. To be sure, a refactoring of current lending regulation is needed. Regulation should be based around the credit type, and not the credit lender—from brokers to thrifts, varied institutions issued subprime mortgages, each subject to different Federal regulation, some subject to none at all. This mosaic needs to be replaced with a single Federal regulator, with clear-cut rules and an understanding of modern debt instruments. But these changes need to be made cautiously, striking a balance between consumer protection and market efficiency.

Intrade is pricing the risk of recession in 2008 at 47%, and that presupposes any policy action. This is a big jump in just the last few months; the pricing was at 30% as recent as August. With nearly even odds, it is well past time to rejigger your asset allocation.

Negative Campaign Ads

Over at CNN, who is generating news as much as reporting it, much ado about negative campaigning. Joey pointed me at this:

Negative campaigning is as old as the Republic. Thomas Jefferson's opponents predicted in their brochures that if he became president, "murder, robbery, rape and incest will be openly taught and practiced."

In the 1828 presidential campaign, Andrew Jackson's opponents accused him of murder, gambling and treason and said his wife was a prostitute.

The accusations against President Jefferson are slanderous, but the President Jackson claims are probably true.

And let's not forgot LBJ suggesting that a vote for Senator Goldwater is a vote for nuclear armageddon:

Tuesday, November 27, 2007

Citibank Bailout

Abu Dhabi Investment Authority (ADIA), the institutional investment arm of the UAE emirate of the same name, executed a $7.5 billion capital infusion into Citigroup, the Journal reports.

The terms of the deal reveal the depths of Citigroup's, and by proxy the whole Street's, trouble:

  • "ADIA will become one of Citigroup's largest shareholders, with a stake of no more than 4.9%," which will "exceed that of Saudi Prince Alwaleed bin Talal, long known as one of Citigroup's largest shareholders."
  • "The shares are required to be converted into common stock at a conversion price of between $31.83 and $37.24 a share over a period of time between March 2010 and September 2011."
  • The kicker: "ADIA will receive convertible stock in Citigroup yielding 11% annually."

Eleven percent! Absolutely insane, and the irony is rich: With that rate, Citigroup itself has become a sub-prime borrower! That yield is well above the current rate for Citi paper (about 9%), and more generous still given that the bonds are convertible at a price premium only 1% above yesterday's five-year-low close.

Even more absurd, the markets are opening with a strong positive bias, with the DJI up almost a hundred points.

Write these numbers down, next to today's date: 12,743, 2,540, 1,407

Sunday, November 25, 2007

Biden/Romney Ticket

Lame: biden08.com.

But before the media invents a story, the name records are not the same as Governor Romney's site.

Also, Mark Halperin's Times OpEd is generating plenty of response—not unexpected given Mark's pedigree and the fact he is basically saying his entire career has been a net negative for America. I will add two bits. First, unlike many, Mark is in a unique spot to affect change. Second, the article is two words short of finished: I'm sorry.

Finally, see Mobile Web: So Close Yet So Far, also in today's Times. I agree with parts, disagree with others. But one statement sticks out as unfortunately untrue: There are also the requisite start-ups chasing the market.

If only wishing made it so. We don't have even a fraction of the entrepreneurial interest, no where near the innovation, in the mobile space that we have on the web, which is open, flexible, and imposes minimal entry barriers, despite mobile being a larger and more lucrative market.

Friday, November 23, 2007

More Thoughts on the Kindle

Some insights after reading a book and a couple Journals on The Kindle:

  • The next/previous page buttons are really useful; I can get into this rhythm where I press the next button by flexing my hand as it holds the device.
  • The next/previous page buttons, being so large, make it difficult to change your grip on the device (including pick it up) without clicking one or both.
  • Next buttons adorn both sides of the device; I can hold The Kindle with either hand, in varying positions, and still turn the page, a feat impossible with paper books.
  • The device does inline lookups for back-matter and other notes, which makes reading them much easier than with a paper book.
  • I have seen minor ghosting on a few occasions, which Amazon acknowledges. The artifacts are not annoying, but I expect better.
  • When connected via USB, The Kindle appears as a USB mass storage device.
  • Battery life is impressive. The battery is at 50% after several days with wireless turned on. I do not even turn the device off; rather, I just let it go into its sleep mode (wherein it paints a pretty picture to the screen before turning off).
  • There is no inline Wikipedia lookup, which is disappointing. You can, however, search the collaborative encyclopedia using the built-in search tool.
  • Newspaper are more enjoyable than on first pass. The metaphor is still rough, and requires too much clicking and scrolling, but it works. I might keep my subscription after all.
  • Likely my most flattering comment: Books on The Kindle are a pleasure. The device fades out, the text consumes all, and you are easily lost in the words.

A few intrepid readers wrote in to point out that iRex's iLiad sports a stylus over its e-paper and the result is lackluster—as with the iPhone, input is prone to errors. I still believe that typing is so limited a task (at least with the more-focused Kindle) that a compromise on input device is acceptable, but their poor experience renders my previous suggestion less obvious.

Wednesday, November 21, 2007

Review of the Amazon Kindle

My Amazon Kindle is here, unpacked, charged, and sporting a couple books.

First off, let's address my most scathing comments: the "thing is hideous" and "horrid in appearance." After face time with the device, I still find it unattractive, although its not as 1980s as it looks in photos. The biggest issue is the keys; they consume nearly a third of the device, when ideally the screen should occupy 95% of the face. Nor is the white color appealing. It worked for the iPod, which was small, but not for the Kindle—white is not a flattering color for those of size. It is also going to get very dirty.

The goal, I suspect, was usability over elegance. For all its ugliness, the device fits comfortably in your hands. The color helps it blend in, ensuring that the focus is on the text and not the contraption. The shape mimics a book and common book operations—such as turning the page—are natural. The tradeoff was intentional.

Even given this design decision, the keyboard is still a problem. Large and obtrusive, the keyboard steals precious real-estate that should go to the screen. Worse, the device's common use case is not even typing. For most of your interactions with the Kindle, you never touch the keyboard. That is a poor compromise. For the next revision, Amazon needs to ditch the keyboard altogether, increasing the screen size (or shrinking the device) to match. I don't see any technical reason why you could not couple E Ink technology with a touchscreen—anything but this monstrosity. Adding salt to the wound, the keyboard is not even very good: with an unusual layout and angle, typing is weird, although I can type with two hands. Odder still, due to the E Ink there is a discomforting lag between your keystrokes and the resulting letters showing up on the screen. The delay is in the sub-second range, minimal and not a real burden, but unnatural compared to modern machines.

Amazon Kindle

I bought two books, one directly from the device, one from my laptop. In both cases, the book was automatically sent to the device within a minute. Buying over the EVDO connection is fast and easy. The marketplace is intuitive to navigate and the system uses Amazon's patented 1-Click technology to make the purchase literally a single click (Kindles are linked to your amazon.com account at time of purchase). Its very cool to click a button and seemingly instantaneously have a copy of a book on the device, sans wires.

The device is clearly optimized for the bookworm (as opposed to the aesthete or the geek). The previous/next page buttons are well-placed and, although E Ink has perceptible page transitions, page flips are faster than turning paper pages. The inline dictionary lookup is useful, although I could not find the advertised Wikipedia lookup. The text is quite readable and is eerily similar to ink on paper. I have seen Sony's Reader (but not the just-released version) and, although the screen should be the same, the Kindle looks better. I am not going to dwell on what E Ink offers—persistent display, low power draw, no flicker, no need for backlight—except to say that the Kindle seems as good an exemplar of electrophoretic display technology as anything else. Given the readable text and usable interface, I am cautiously optimistic that the Kindle can replace physical books.

I am less sure of newspapers. I speculated that the newspaper and magazine subscription service was the Kindle's killer feature. A device that is automatically pushed the day's paper every morning is the future, right up there with flying cars and an insolvent social security. So I subscribed to The Journal. To be sure, its neat having a copy of the day's paper always on hand, and the $9.99/month price is fair. But, while the Kindle successfully captures the book metaphor, it is not so good with newspapers. Although basic book navigation is a pleasure, more complex interactions are less fun. The Kindle's unique scrollbar and scroll/clickwheel are nice, but moving through menus and other hierarchies require too much scrolling and clicking. Unfortunately, that is largely what a newspaper is—a series of sections and subsections, each containing a bunch of articles. Navigating articles is time consuming and it is hard to get a grasp on what is left to read. I also cannot glean sufficient information from the headlines to decide whether to read the article; thus the headline list is nearly worthless and I have to jump into and start reading every piece. I do this with the dead tree version of The Journal as well, of course, but the physical form makes that sort of article skimming easy.

Amazon Kindle

So whereas my initial reaction to the Kindle vis-á-vis books is positive, my first-pass experience with newspapers suggests I might not renew the Journal subscription. Alternatively, you can buy individual dailies for $0.75, which sounds incredibly useful right before a flight. Stocked up on a couple newspapers, I am one happy flyer.

The system—Linux 2.6.10 and firmware 1.0 (build 121380292)—boots quick, from off to on and usable in under ten seconds. But the runtime power management seems good enough that you do not need to regularly turn the device off. Instead, I would just disable the wireless, for which there is a convenient switch right next to the power. But even that may be unnecessary, as the device appears capable of turning the wireless off when not in use, although I presume it turns it back on at regular intervals to check for pending pushes. Folks who use the subscription functionality to push a newspaper to their device every morning will need to get into the habit of keeping the Kindle plugged in overnight; everyone else can be fairly relaxed. I do not yet have any longer term battery measurements, but I played with my device all of yesterday and again this morning after a single quick charge and the battery level is still 100%.

The Kindle has a couple of experimental features, including a web browser, which does not seem to have any restrictions on what you can access. Obviously text content renders best, but even complex HTML and images came out okay. In fact, given the large screen and fast EVDO interface, the experience was pretty good. I suspect this functionality won't be enabled forever, or at least won't be free, given the freeriding potential.

Amazon Kindle

Another experimental feature is Ask Kindle NowNow, which is a free crowdsourcing Q&A market implemented using Amazon's Mechanical Turk. I asked, "what is the rarest variant of cheetah?" A couple of minutes later, my Kindle had a new entry in its content list, containing three answers: two votes for the rare King Cheetah—a decidedly rare mutant—and one reply going with the albino cheetah. Given my unscientific use of "variant," I don't know what the right answer is, but I was expecting the King. As with web browsing, I suspect this functionality will not remain free indefinitely.

One of the most significant trends the Kindle could fuel is downward pressure on book prices. With hardcovers clocking in at $20 or $25, Kindle's $9.99 is a huge change that will substitute physical for virtual book purchases. The question is, to what degree? The current rigamarole that publishers dance through does not help prices; deciding how many books to print in each run and managing the publisher-bookseller relationship is a real mess. A distribution mechanism with less risk and no supply chain hassle is a big win.

I have not mentioned the Kindle's restrictive terms of use or the inability to easily modify the device. Why? Because I am placing pragmatism before ideology. More importantly, consumers don't care. The book market is not the same as cellular, the Kindle is not the same as Android—there is no unabashed rent seeking, no inefficient industry, no lack of innovation despite so many possibilities. (The EVDO connection on the Kindle is actually a great example of the sort of innovation I hope Android to spur. Why aren't all of our devices on the network?) Longer-term, we need open standards and open devices to ensure price competition and foster innovation, but let's be practical and take an iterative approach. The Kindle is, after all, just a damn screen for reading text and I buy all my books from Amazon anyhow.

What we do have, however, is a specific want: Get lots of books on a small, lightweight device that is enjoyable to read in varied environments. The Kindle satisfies that want. As Jeff wrote, "our top design objective was for the Kindle to disappear in your hands—to get out of your way—so you can enjoy your reading." And the Kindle meets that objective. For specific users—the heavy reader, the frequent flyer, the geek—the Kindle is a home run. But you will have to wait, as the device is already on backorder.

See also: My initial thoughts and my discovery and analysis of the device's use of Linux.

Update: Miguel asks if I confirmed my suspicion that the device lacks PDF support. Indeed, the Kindle cannot read PDF. You are not even able to use the conversion user@kindle.com mechanism to rejigger them into AZW files. Given that so many PDFs are images (from scans) and not text, it is easy to overestimate the utility of this feature, but its absence is still lame.

Tuesday, November 20, 2007

Microsoft, Innovation Engine

Funny post over at Google Blogoscoped: What If Gmail Had Been Designed by Microsoft?

Joking the other day, I mused on how bad it would be to work at Microsoft: I would have to give up Linux for Vista, Android for Windows Embedded, iPod for Zune, Google for Live, Firefox for Internet Explorer, Gmail for Exchange.

In all seriousness, I do not even know what to say to that record. They have an answer for everything, and it is the wrong one.

Monday, November 19, 2007

Kindle Powered by Linux

My Amazon Kindle is not yet here, but I came across the device's source code notice, which reveals the book reader's OS: The Amazon Kindle is powered by Linux, specifically a 2.6.10 kernel and an assortment of familiar user-space bits1.

On initial study, nothing particularly brow-raising jumps out among the kernel changes: some driver modifications, XIP on MTD, a backport of kstrdup and kzalloc, squashfs, Samsung's RFS, and a procfs interface for forcing the reset of TCP connections.

Most notable is a power-saving infrastructure named fpow, which provides device-level power management and aggressive system suspend functionality that is responsible for the device's excellent battery life. The architecture, which is based around an Intel PXA250 chip, is alternatingly labeled Fiona and Lab126 in the source. The former is the codename for the Kindle as a whole (some amazon.com URLs leak the name). The latter, interestingly, is apparently an Amazon subsidiary that is "an innovative consumer-focused startup company" who "design[s] and develop[s] easy-to-use, highly integrated consumer products to serve Amazon customers" including the Kindle.

I generated a diff against 2.6.10.

If curious, Kindle users can download the complete tarball.

1 Source posted includes alsa-lib-1.0.6, alsa-utils-1.0.6, binutils-2.16.1, bsdiff-4.3, busybox-1.01, bzip2-1.0.3, dosfstools-2.11, e2fsprogs-1.38, freetype-2.1.10, gcc-3.4.2, jpeg-6b, libpng-1.2.8, linux-2.6.10-lab126, module-init-tools-3.1, ncurses-5.4, ppp-2.4.4b1, procps-3.2.7, taglib-1.4, u-boot-1.1.2, uClibc-0.9.27, util-linux-2.12, and zlib-1.2.3.

If I did gifts

What I want for Christmas: Genotype my DNA with 23andMe.

For only $999 and a saliva sample, 23andMe raises the question of how family members will deal with the negative externality of one member's genotype revealing unfavorable information about the whole clan (see Queen Victoria). Of course, there is also the positive externality where, if my parents genotype their secret sauce, my incentive to pay for the service is lowered. I suspect, however, that my father sports ACTN3 is less smiles than my mother carries a mutation of BRCA1 is dread.

Still, I want to do it. Also, it will be a prerequisite for any future mate.

Firewood

Amazon's Kindle is out and available for purchase. I ordered a device and it will arrive tomorrow at Google Boston (we are hiring, by the by). I make that early sacrifice so you do not have to.

Amazon Kindle atop a book

Initial thoughts:

  • The thing is hideous. Absolutely horrid in appearance. Much of this is due to the fact it is white, but the bar set by Apple is not even grazed. Joey, aghast at "all those buttons," remarks that "it looks like it was designed in 1989."
  • As speculated, the EVDO connection powers a mobile marketplace—service is free and transparent with a Kindle purchase—called Whispernet. You can browse the book catalogue, purchase content via your Amazon account, and download, all directly from the device and over the highspeed cellular network. No computer required.
  • It seems to only support Amazon's proprietary AZW format—you can't even read unencumbered PDFs.
  • Purchase includes a foo@kindle.com email address, which you can use to email yourself "Microsoft Word (.DOC), HTML, JPEG, GIF, PNG, and BMP and TXT files" for $0.10 a document (presumably to cover the cellular access). You can also upload (for free) these files to the device via USB (cable included). But no PDF?
  • Unlike the situation with iTunes, it appears that Amazon will manage and allow later retrieval of your books: "Your Kindle content is stored in Your Media Library in case you want to re-download [it] at a later date."
  • Inline dictionary and Wikipedia look up of any word over EVDO is hot, although the term used in the demonstrative video, profligate, was poorly selected.
  • Display specs: 6" diagonal, 600x800 at 167 ppi, 4-level gray scale, powered by Cambridge's own E Ink.
  • Battery life looks good. Lasts "a week or more" with wireless off. Recharges in two hours.
  • The killer feature, for me: Newspaper subscriptions, automatically pushed to the device every morning, for $5.99 ~ $13.99 a month. Available dailies include The Times, The Journal, and The Post.

Technology pundits are likely to fall into one of two extremes, this is the iPod of books or no one wants to read books on a screen, a function of whether they were included in the launch and are under 40. Without pause, the open source crowd is going to say it is too closed. The target market won't appreciate whether the format is open, or the OS is Linux, but they will care if the device is too limited or costly for practical use. Indeed, the iPod played MP3s, after all, even if the ultimate experience with that device is iTunes-based.

A key user is the frequent flyer. I routinely travel with several books and a stack of magazines. Both my back and my overstuffed bag would appreciate replacing the dead trees with a single 10.3oz Kindle. I've also been burned on enough trips with a new book that I realize all-too-late I have no interest in reading that the ability to slurp down a text or two right from the gate is incredibly appealing.

I will pen an update once I have some face time.

Sunday, November 18, 2007

Norris, Huckabee, Kindle, Old

Chuck Norris shills for Governor Huckabee:

Also, Amazon Kindle coming tomorrow—see gushingly positive Newsweek puff piece. The newspaper subscription feature is stunning, to be frank, and will be big news itself if the functionality doesn't price itself out of practicality. But is the device too closed? And why not give the blog subscription feature away, as a teaser?

Finally, No Country for Old Men is a disturbingly effective movie. Javier Bardem, half assassin with a bowl cut, half literary symbol, is unsettlingly realistic in an Oscar-worthy performance.

Rachael Ray

Robert Love and Rachael Ray
The author and Rachael Ray, whoever that is

Wednesday, November 14, 2007

A Dozen Years Later

When I first compiled a Linux kernel—version 1.1 or 1.2 I believe—the ordeal took well over an hour.

Working on the preemptive kernel, with some sort of Pentium III, I spent about 20 minutes on each fresh build. Hacking on inotify—I am recalling the different projects were I rebuilt the kernel a hundred times a day—the time spent was under ten minutes.

Somewhere since then recompiles dropped to several minutes, and then a minute or two. I don't know when I actually crossed the chasm, but today I noticed my first sub-minute kernel compile: 48 seconds. And this is with gcc 4.2 and gnome-terminal, no friends of the cause.

Just as titillating, with my 2400 "baud" modem, it took me two hours to download all of 1.2's whooping two megabytes. Today, I can download all 43MB of 2.6.23 in 15 seconds at almost 3MB/s. As a comparison, it would take two days to download a modern kernel with my old modem.

This is a 150x increase in compilation speeda and 11,500x speed up in network performance in about a dozen years. From then to now, memory and storage have increased in capacity 2,000x and 3,000x, respectively. In fact, I have 64x more video RAM now than I did physical RAM then.

Despite all this, my hard disk's seek time is essentially the same.

The thesis of my 2005 GUADEC talk: Going to disk is 25 million times slower than hitting a general purpose register. Design accordingly.

a Given the use of gnome-terminal versus a raw console, the fact that gcc has grown slower in compilation, the huge increase in size of the kernel tree, and the enlargement of the resulting kernel image, this number is much smaller than it would be in any sort of scientific test.

Tuesday, November 13, 2007

What sort of communist has a problem with homeownership?

I am going to see Senator Obama speak tomorrow, so I wanted to brush up on his proposed tax plan:

Obama’s middle class tax relief plan would provide $80-85 billion in tax cuts to America’s workers, seniors and homeowners by:

  • Cutting taxes for 150 million Americans and their families, allowing them to get a tax cut of up to $1000.
  • Easing the burden on the middle class by providing a universal homeowner’s tax credit to those who do not itemize their deductions, immediately benefiting 10 million homeowners, the majority of whom make under $50,000 per year.
  • Eliminating the income tax for any American senior making less than $50,000 per year, eliminating income taxes for about 7 million American seniors.
  • Simplifying tax filings so millions of Americans can do their taxes in less than 5 minutes.

Plenty has been said on the propoal, which unfortunately is not very interesting. Mostly, it is pandering: Eliminating all income tax for seniors—one of this nation's wealthiest demographics—is just silly. But not a lot has been written about the mortgage interest deduction, likely because an astonishingly-high 70% of Americans own their own homes. But the policy—with or without the Senator's reforms—is distortionary and not worth its high cost.

Don't we want to encourage investment?
Yes, but we don't want to single out one asset, which discourages investment in all other vehicles, perturbing investment flows away from the optimal asset allocation. People are willing to buy bigger homes, and pay more for them, than they otherwise would. Portfolios thus overemphasize housing (fueling an asset bubble) at the expense of other, higher-returning investments. This diverts investment away from productive business. It also encourages "cash poor, house rich" scenarios.

Okay, but isn't homeownership in particular a good thing?
Maybe. Studies have shown that homeownership encourages greater participation in one's community. Americans certainly feel that homeownership is part of the American Dream. To be sure, we should not discourage owning over renting. But the mortgage interest deduction costs over $80 billion a year and homeownership is not all roses, either. Homeowners are less mobile than renters, as one example, leading to a less flexible labor force. The question is not whether homeownership is good or bad, but whether it is worth $80 billion.

Yes?
The goal of the interest deduction is to encourage homeownership—not to encourage the purchase of bigger, better, or more homes. This is important, because it means we only care what happens at the margins. That is, the deduction's success rides on those at the cusp, vacillating between buying versus renting, who without the deduction would decide to rent, but with the deduction choose to buy.

Moreover, only tax payers who itemize their deductions, as opposed to those who take the standard deduction, benefit from the mortgage interest deduction. Itemizing your deductions is extra work, and worth it only if your deductions exceed the standard deduction, which is not a given (particularly for those on the margin).

I do not know how large the intersection of on-the-verge-of-buying and itemizing individuals is, but I suspect it is not huge, and $80 billion is a shotgun approach to aiding them. Indeed, the current policy simply is not very true to its goals: you can deduct the interest from up to a $1 million mortgage, and from a second home

—wait, you can deduct a second home?
Yup, which actually discourages homeownership, by reducing supply and increasing prices. Anyhow, the policy is geared more toward rewarding middle and upper-class homeownership, rather than encouraging homeownership.

Numbers, Mrs. Landingham
Overall, less than one third of Americans itemize their deductions. Only half of homeowners claim the deduction. Perhaps the most interesting statistic is that Canada and Australia have similar homeownership rates to the US, despite no mortgage interest deduction. England previously offered but has since repealed an interest deduction and their homeownership levels remained roughly the same.

Why do we have the deduction at all?
Its a relic from when all interest was deductible, starting with early incarnations of the income tax. Eventually, a deduction on interest became unacceptable and highly distortionary (biasing debt over equity), and it was repealed by the Tax Reform Act of 1986. But the mortgage interest deduction survived.

Isn't the Obama change from a deduction to a credit a step in the right direction?
Not really, as it comes at the problem from the wrong angle. A real solution would end the distributive effects of the current policy. If it is politically untenable to eliminate the deduction, make it apply equally to any investment, not just home purchases. If the goal is to encourage homeownership, then (and it pains me to say this) the deduction needs to be made larger at the bottom of the income scale and eliminated from the top. If the solution is neither investment-agnostic nor more progressive, its just pandering to the middle class, and not a step forward.

What would you do?
My ultimate policy preference is for a consumption tax, without bias toward any one investment vehicle. The FairTax fits this criteria. As a stopgap measure, I would eliminate the mortgage deduction and use the resulting savings to lower the income tax or decrease the deficit.

Monday, November 12, 2007

Android SDK

Android

Watch the video, get the SDK, take the challenge, change an industry.

And kick-start your developer knowledge with the Androidology video series: Parts 1, 2, and 3.

Over at O'Reilly ONlamp, an excellent technical discussion of the Android architecture and SDK.

Sunday, November 11, 2007

Former Clinton Economists

Paul Krugman is a preternaturally intelligent man, an incredibly talented economist, and a sporter of a handsomely-groomed beard (cf. Joey). Perhaps more important, from a societal point of view, Dr Krugman has a wonderful command of the pen. Ten years ago, he was kicking out some of the most lucid, easily-grokked economics writing ever, putting him in the same class as the great Milton Friedman.

Then he checked out and went off the reservation.

The last few years, via his New York Times column, have bared witness to articles about Katrina and FEMA, Iraq and WMDs, Republicans and lameness, Democrats and awesomeness, rich people and Satan, poor people and their salvation by Democrats, France and their superior Internet access (huh?), and then more on Iraq.

Which is all well and good—maybe this stuff needs to get out there, you know, to liberate the minds of the people—but any random journalist could write it. Krugman, an equally talented writer and economist, could be filling a real niche in public education.

Moreover, Krugman's world view is binary reductionist: Explanatory factors are one or both of an incompetent president or an evil upperclass. Think what you want about the leader of the free world or about the generators of wealth and innovation, but where does ill-designed software fit in? Or China?

This is all by way of saying that the New York Times column and the last seven years have not done Krugman any favors. He has gone from economic virtuoso to political hack. Even when he writes on economic topics (which, in these halcyon days of popular and behavioral economics, can be anything), he is too light on the economic theory and too heavy on the political defamation. With Krugman, we don't get an honest treatise on the economic merits of, say, single-payer healthcare, but in lieu drivel such as the GOP hates poor people. Yet honest, accurate economic analysis of these issues is exactly what this nation—particularly the left—needs right now. These are issues on which intelligent, reasonable people can disagree, and the goal should be to raise the level of national debate.

Who or what is to blame? Well, he certainly dislikes President Bush, which I can understand. And writing about economics is nontrivial, particularly when you have to do it twice a week. But he could always opine on more novel topics, introducing new thought, or at least repackage existing concepts into easier-to-comprehend prose. While Krugman understands trade better than most, he really does not know any more about Iraq than the rest of us. Ultimately, his discontent with the president pushed him off the deep end, and the Times has enough like-minded readers to reinforce that behavior. It is a tragedy, if not for Krugman, certainly for the nation.

Anyhow, that is all in introduction to this: Paul Krugman has a good piece up, Robert Rubin is wrong about the dollar, albeit in his blog and not his column.

The post is a rebuttal to a Secretary Rubin quote in the Financial Times:

Mr Rubin's mantra of the US believing in a "strong dollar" was taken on trust by investors. Now, he has a window seat at not only the troubles of Citigroup and Wall Street but what threatens to become a dollar rout. He says things could have been different if George W. Bush's administration had observed his devotion to a balanced budget and co-operating with other countries.

"You could have had surpluses that affected the savings rate and would have helped the trade balance. I think you would have had more confidence in the policy framework and you would have had a better dollar," he says regretfully. He pauses to reflect. "But we are where we are."

Arguing that the Bush tax cuts decreased the US savings rate, which in turn weakened the dollar, Bob Rubin echoes a Times OpEd back in August, A Weak Dollar and the Fed, that, to an even greater degree, tosses out economics for Bush-bashing:

How did the Fed lose room to maneuver? The answer is rooted in the Bush administration’s misguided economic policies.

Over the last several years, America's imbalances in trade and other global transactions have worsened dramatically, requiring the United States to borrow billions of dollars a day from abroad just to balance its books.

The only lasting way to fix the imbalances—and reduce that borrowing—is to increase America's savings. But the administration has steadfastly rejected that responsible approach since it would require rolling back excessive tax cuts and engaging in government-led health care reform to rein in looming crushing costs—both anathema to President Bush. It would also require revamping the nation's tax incentives so that they create new savings by typical families, instead of new shelters for the existing wealth of affluent families—another nonstarter for this White House.

Stymied by what it won't do, the administration has gone for a quicker fix—letting the dollar slide. A weaker dollar helps to ease the nation's imbalances by making American exports more affordable, thus narrowing the trade deficit.

The Times is saying that The Fed needs to continue interest rate reductions, except that it cannot, because lowering the interest rate will cause the dollar to fall further, and that this whole quagmire is the fault of President Bush's tax cuts. Krugman, surprisingly but not unwelcomely, rejoins:

There is a widespread view that world payments imbalances can be remedied through increased demand in surplus countries and reduced demand in deficit countries, without any need for real exchange rate changes. In fact shifts in demand and real exchange rate adjustment are necessary complements, not substitutes. The essential reason for this complementarity is that a much higher fraction of a marginal dollar of US than of foreign spending falls on US output. As a result, a redistribution of world spending away from the US leads to an excess supply of US goods unless accompanied by a decline in their relative price. Although some economists believe that the integration of world capital markets somehow eliminates this problem, this is a fallacy that confuses accounting identities with behavior.

(His post continues with a more readable, but much longer, lay explanation.)

I have long supported reforming government policy, such as moving from a tax on output to a consumption tax, to encourage savings over consumption. I also believe we need to reduce the budget deficit, preferably through entitlement reform and other reductions in government spending.

But I do not believe that increasing savings will strengthen the dollar. Indeed, both Secretary Rubin and the Times editorial board are wrong: Ceteris paribus, increased domestic savings will weaken the exchange value of a domestic currency.

One of the basic mechanisms by which lowering interest rates stimulates an economy is by lowering the exchange value of the currency and thus trending the trade balance in favor of exports. That is, a weaker domestic currency makes imports more expensive relative to domestic goods, thereby encouraging consumption of those domestic goods, ultimately increasing exports relative to imports. Moreover, a weaker currency makes goods denominated in that currency cheaper for those living in other countries, further encouraging exports.

You can look at the issue from another angle, too: Increased savings is equivalent to decreased consumption, decreasing consumption will result in a slowing of the economy, which in turn will cause The Fed to lower interest rates. Consequently, that reduction in interest rates will discourage the inflow of foreign capital, which will reduce the demand for the domestic currency, which finally will decrease that currency's exchange value. Given this, the Times and Rubin argument that the weak dollar is a resultant of a lack of savings is actually inverted. This relationship between savings and interests rates and the exchange value of the dollar is basic economics and wholly unrelated to President Bush's tax policies.

In fact, while it might not be what Rubin and Wall Street prefer, we should all want a cheaper dollar. Unless we want to keep the trade deficit at four or five percent of GDP, the exchange value of the dollar has to drop. Rubin and the Times, however, are right that an increase in savings can reduce the trade deficit. Increased savings is the same as decreased consumption, which means we buy less of everything, imports included. If we slow the economy enough, we can greatly reduce the amount of foreign goods we buy. But I don't think the Times is advocating forcing the economy into a brutal recession just to balance trade—people might buy less newspapers. So we have to couple the increased savings with a propensity for favoring domestic over foreign goods. How do you do that? With a cheaper dollar, of course.

As Krugman points it:

What it means is that something has to happen to induce people to switch to US goods. And it means that higher savings will normally reduce the trade deficit because they result in a weaker dollar.

It is naive to imagine that changes in the government's financial balance can translate directly into changes in physical trade flows, without working through a mechanism such as the exchange rate.

The Times is also wrong in their explanation of the reduction in US savings. The primary cause is the collapse of the housing bubble, which significantly propped up consumer consumption, not tax cuts and the resulting budget deficit. Again, increased consumption and decreased savings are two sides of the same coin.

There exist plenty of real problems with President Bush's economic policies; we do not need to make up nonexistent relationships between the weak dollar and lack of savings or blame the president for basic economic realities.

Iraqi Debt Evaluates The Surge

In today's Sunday Times, Austan Goolsbee discusses calculating the long-term prognosis for stability in Iraq using not military or political metrics, but the pricing of Iraqi government debt. The price of Iraqi bonds, after all, contains the credit spread (the risk premium) that markets—politically unbiased—place on the Iraqi government's chance of default. Like most of Dr Goolsbee's writings, the article is a good read.

If not satiated, the article is based on a paper by MIT economist Michael Greenstone entitled Is the "Surge" Working? Some New Facts. As an NBER working paper, you can download a copy, but it costs $5 USD, which seems decidedly counterpoint to a dedication to promoting a greater understanding of how the economy works. Thankfully, SSRN has copies gratis.

Anyhow, here is the paper's conclusion:

There is a paucity of facts about the effects of the recent military "Surge" on conditions in Iraq and whether it is paving the way for a stable Iraq. Selective, anecdotal and incomplete analyses abound. Policy makers and defense planners must decide which measures of success or failure are most important, but until now few, if any, systematic analyses were available on which to base those decisions. This paper applies modern statistical techniques to a new data file derived from more than a dozen of the most reliable and widely-cited sources to assess the Surge’s impact on three key dimensions.

The analysis reveals mixed evidence on the Surge’s effect on key trends in Iraq. The security situation has improved insofar as civilian fatalities have declined without any concurrent increase in casualties among coalition and Iraqi troops. However, other areas, such as oil production and the number of trained Iraqi Security Forces have shown no improvement or declined. Making sound decisions about how to proceed in Iraq based on such conflicting indicators is challenging and uncertain. Moreover, this uncertainty may allow analyst judgment and politics to play too large a role.

There is, however, another way to assess the Surge. This paper has shown how data from world financial markets can be used to shed light on the central question of whether the Surge has increased or diminished the prospect of a functioning Iraq. An appeal of using financial markets is that traders’ only concern is to make profitable decisions and this necessarily requires making correct projections. There isn’t room for personal biases in this setting and it therefore isn’t surprising that financial markets have a good track record of predicting future events.

I examine the price of Iraqi state bonds, which the Iraqi government is currently servicing, on world financial markets. After the Surge, there is a sharp decline in the price of the Iraqi bonds, relative to alternative bonds. This decline signaled an increase of approximately 40% in the market’s expected annual probability of default. This finding suggests that to date the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it. In many respects, it is consistent with recent assessments that fail to find that Surge has led to substantial progress toward meeting many of the 18 congressionally mandated benchmarks for progress in Iraq (GAO 2007).

This paper has produced a series of new facts on the Surge’s impact. It is straightforward to update these facts as new data becomes available. Further, the new facts can be used to aid decision making about the future of the Surge.

More broadly, the paper shows that even in unconventional wars, it is feasible to measure and analyze important outcomes to learn about the war’s success. Finally, it highlights that world financial markets may be an important new source of information to judge a war’s success.

Dr Greenstone shows that the yield on Iraqi bonds increased to 11.32% in August 2007, from 9.60% in January 2007. He concludes that this prices in a "40% increase in the market's expectation that Iraq will default." Lovely.

Tuesday, November 6, 2007

Old Glory Insurance

The Worst Name in News: Obama supporters pressed officials to keep Colbert off ballot.

This headline says a lot about the demographics of Senator Obama's supporters. Unfortunately for the Senator, Colbert's get-out-the-vote mobilization notwithstanding, that demographic votes not so much, leaving the fate of our nation to those who will not be around to reap its fruits and who are afraid of robots:

Saturday, November 3, 2007

Questions and Questions

Why aren't dual layer DVD's layer transitions done during scene transitions—that is, why is the pause always at the worst possible frame, and not after a fade to black?

Musharraf Declares Martial Law is News with a capital n, but you would not know it from watching, you know, the news.