Quick review: Tournament of Shadows – The Great Game and the Race for Empire in Central Asia

A post long-overdue: I chipped away slowly at this 560pp beast.  Overall, would strongly recommend for anyone deeply interested in the minutiae of central Asian history.

Liked: the flow and tone of the narrative; the range of stories included; the authors’ effectiveness in bringing the central characters to life.

Maybe Not For Everyone: while I’d recommend this book to history buffs, for those looking for a more direct tie to today, there are other, better reads (see posts below).  This is a fun book, and one with great detail, but if you’re looking for a first primer on how central asia got the way it is not a good starting point.

The false temptations of a wealthy company

Just a quick re-post and response to a dealbook entry today that I found fascinating.  There has been an ongoing debate in the financial watching — and investing — community about the path cash-rich technology companies should follow to maximize long-term shareholder returns.  On one side, there are analysts (e.g. the Alliance-Bernstein ones mentioned below) who argue that these companies (Google, MS, ORCL, etc) should distribute a dividend of their cash reserves, and then raise debt or equity capital if/as they need it to perform acquisitions.

Ok, I buy that’s one reasonable path.  But for me to believe the argument, I’d want to see a pretty detailed assessment of the impact on imputed growth expectations in these companies’ share prices.  Their strong balance sheets show they can grow opportunistically — through acquisition or internal investment.  Moreover, even if some acquisitions fail, or the price paid ends up being unjustifiably high, there are others that are quite successful (MySpace still looks pretty brilliant for NewsCorp.).  So, isn’t the real point that companies should seek to grow, profitably, and acquire wisely?  Or do we really think their stocks will move like GE’s?

April 7, 2009, 1:11 pm <!– — Updated: 4:17 pm –>

Google and the Temptations of Being Cash-Rich

As blogs continue to debate whether Google might be considering a deal for Twitter, analysts at Sanford C. Bernstein are making their views on the subject unmistakably clear.

Not only have they repeated their claim that Twitter’s business model is flawed (or nonexistent), but they went even further in their latest report: They said that Google and other successful Internet companies would generally be doing their investors a favor if they returned their cash to shareholders rather than using it to buy unprofitable start-ups.

The analysts argue that Internet companies have a bad track record when it comes to acquiring “pre-business-model” companies like Twitter, a popular microblogging service that has yet to produce profits — or even revenues. The Web is littered with examples of promising but ultimately value-destroying acquisitions, they wrote in a note to clients, citing deals like AOL’s $4.2 billion acquisition of Netscape and eBay’s $4.1 billion acquisition of Skype.

Pressure to put cash to work may have led to some of the disastrous deals in Silicon Valley over the years.

And Google is expected to be sitting on $17 billion in cash and $7 billion in short-term investments, earning about 1.8 percent before tax, by the end of 2009, the analysts said in a note published late last week. With all that cash on hand, Google executives might not be able to resist a high-priced acquisition, they suggested.

But a deal for Twitter would continue the cycle of big Web companies basically subsidizing the pursuits of Silicon Valley venture capitalists, the analysts asserted — all at the expense of shareholders.

It is worth noting that Google’s chief executive, Eric Schmidt, recently said his company doesn’t expect to be active in making acquisitions. In addition, Google paid for YouTube, the video-sharing service, with stock, not cash.

Even so, the analysts at Sanford Bernstein said they think Google should consider giving, say, $20 billion of its cash pile back to shareholders in a one-time dividend of about $60 a share.

Such a move is not likely to happen. But the analysts contend that by putting the easy money out of reach, Google or other Web executives would be forced to go to the debt and equity markets to fund a deal — which could help ensure that they do not overpay.

– Cyrus Sanati

My new “new” Asian Gateways

Over the past two weeks I’ve been working in Asia — Hong Kong, Taipei and Singapore — assessing market opportunities for my employer, SecondMarket.  A few interesting observations out of this work:

• The Expat Model of Fund Management and Financial Services is Dying: I was last in Hong Kong exactly five years ago (for the Hong Kong 7s); when I was here last, energy and capital were flowing East, exuded by western (American, W. European) funds and fund managers. Then, my flight over from NY (as my flight over from Boston a few years earlier had been) was packed.  Fund managers snapped up talent bellering that:  “HK as the gateway to China” — a bridge for capital formation and indirect investment into “Greater China”.  Now, purportedly, Och-Ziff, Soros, etc., who so eagerly opened presences here in the 2004-2007 boom window have wound down their operations.  ExPat Club and School enrollment is apparently plumetting (someone really ought to create a private school enrollment indicator to measure the health of global financial centers — from what I’ve seen it would work brilliantly in NY, London, HK, and Singapore) and I had half a dozen local friends ask whether we’d be willing to hire here – sending me the CVs of their formerly top-ranked banker, HF and PEq friends (all expat).  Perhaps most tellingly, the business class section on my early-week, Cathay Pacfic flight from JFK to HK was 2/3rds empty.  And I’m writing this from the Cathay Pacific business lounge in HK, preparing to get on my flight back to NYC, and I’m one of a handful of whitefaces in a packed lounge, preparing ethnically Chinese business to board their flights to Tokyo, Sydney, Kuala Lampur and Dubai.  If I had to make a bet, the former expat model in financial services/fund management here (HK) and potentially also in Singapore may be in a potentially terminal tail-spin.  Why employ expensive non-Chinese speaking foreign talent to allocate capital or advise companies when locals are better-suited and oftentimes cheaper?  A correlary of this argument might be that western Fund-of-Funds and Advisors will be of increasing importance, as they guide western capital through local intermediaries to find primary opportunities on the continent.  Anyone — who speaks Chinese — want to start a Asia FoF with me? 
• The Asian Upper-Middle Business Class is Here to Stay — and They’re Better Positioned Than the “Global Western Businessman”: Across Asia the Tycoon class have longed been watched with envy.  Likewise, western consumer-focused businesses have eagerly tracked the rise of the Asian middle-class.  But what about the Asian upper-middle? — the equivalent of the 10-branch store owner who drives an M3, golfs avidly, and whose kids drink themselves senseless before going to USC business school and taking over the family business?  The Asian version is probably better-positioned, because they speak Chinese, were oftentimes educated (at least partially) in the west so they are globally comfortable, and also because there are SO many more business opportunities.  As an expample, a Chinese-speaking contact in Singapore is producing films in China and India, investing in restaurant management in Dubai, and banking across the SoPac — and he’s part of a two-man show!  The very immaturity of many local markets provides a HUGE opportunity for a local, saavy, hard-working business people…whereas the US only needs so many new “bar-club” owners, franchisees, or multi-branch commercial insurance agency-owners.
• The Business Community That Matters is Still Small: The only good news I found out of my trip (thinking in terms of a westerner who might want to do business here) is that the folks here who matter as a western business-person are countable, known, and, if you find the right “bridge-head” (usually a US-based, western-trained Asian biz person who’s operated here) not that hard to access/sway to work with you.  True, these locals may be richer, better-educated, and more mutlilingual than you, but provided you are rep’ing a reasonable product or idea, they’ll listen to you — they are, after all, good entrepreneurs.

A few concluding tirades: we in the US need to develop more products that are reasonably-priced and sticky for Asian consumers.  Music and luxury brands alone doesn’t cut it.  We need to develop strong distribution relationships with local partners on the ground here — because in-person matters, and the chance we’re going to learn Chinese and come out here is slim-to-none, and we need to ever-more focus on Education — language, technical, cultural — not only so we can have some chance of keeping up, but also so we can continue re-exporting western-educated (secondary, tertiary) Asian-based business people who are friendly to us.  Otherwise their markets are going to let them beat us.  It’s just a numbers game, after all.

Innovation on Wall St.

The weekend’s financial and popular press was rife with it: “Soros sees no bottom for world financial ‘collapse’” screamed one Reuters’ headline that received wide syndication.  But the NYTimes counterposed that the creation of new markets may stem this tide — and a bit shamelessly, I might add, plugged my employer:

“In the weeks after the Lehman Brothers investment bank collapsed last fall, Robert C. Lieber, the deputy mayor for economic development, was predicting that Wall Street would confound doomsayers by bouncing back faster than expected and reaffirm New York as the financial capital of the world.

Last week, Mr. Lieber and his colleagues at City Hall sounded a very different tune: most of the financial jobs lost in this crisis, they predicted, would not be regained in the next several years — if ever.

“We’re not looking to recreate what was here before,” Mr. Lieber said. “We’re acknowledging the changes and looking to diversify within financial services and outside financial services.”

That admission, as much as any other, highlights just how significantly the thinking about Wall Street has changed in a matter of months.

Early last year, city officials were still fretting about the rise of London’s financial industry and the competitive threat it posed to New York. Now they are worried about filling a huge hole in the city’s economy while trying to retain thousands of laid-off financiers before they scatter across the globe.

They now forecast that the financial services sector that powered the city’s prosperity will shed 65,000 jobs as a result of the financial crisis. Almost half of them will come from the highest-paying pursuits like investment banking and the sales and trading of stocks and bonds, according to an analysis the city commissioned from the Boston Consulting Group.

The study concluded that what remained of the sector would be far less profitable than it was. In 2007, its $70 billion profit amounted to about 22 percent of its revenue, the study found. But it concluded that that profit margin could decline by half or even three-quarters before it started to grow again. The speed and depth of the reversal of Wall Street’s fortunes have shaken the faith of city officials in the staying power of the biggest corporate employers and driven a rapid overhaul of their economic development policies. No longer can they count on the financial sector to supply one-third or more of all the compensation paid out in the city, as it did in 2007, or to fill the coffers of the city and state governments with tax revenue.

Mayor Michael R. Bloomberg’s news conference last week in a converted warehouse near the Holland Tunnel revealed a stark turnabout in his administration’s approach.

It had been only four years since Mr. Bloomberg piled up more than $100 million in incentives to persuade Goldman Sachs, one of the world’s most profitable companies, to build a 43-story headquarters near the site of the destroyed World Trade Center. That building, still under construction, was designed to have hangar-size spaces where hundreds of traders could buy and sell all sorts of high-risk securities. Trading floors like those were supposed to help set New York apart from its rivals.

But last week, Mr. Bloomberg laid out a very different vision of the city’s future. Standing in a large, empty space a mile north of the financial district, he pinned hopes for a financial revival on businesses of a different scale: start-ups conceived and managed by the defrocked wizards of Wall Street.

Rather than write them off as losers in the casinos of capitalism, city officials are encouraging them to start over, the Silicon Valley way. As part of a $45 million program, the city will subsidize garage-size offices as hatcheries for their most promising ideas for new businesses in finance or other fields.

“This represents a fundamental shift in public policy,” said Kathryn S. Wylde, the president of the Partnership for New York City, a group that represents the interests of big corporations. That shift, she said, accelerated rapidly last fall as it became clear that the big firms that had been the pillars of economic growth would be shrinking and recasting themselves for years to come.

“When the financial crisis started to hit and we began to get the first information about the potential losses of jobs and revenue, I think that made the conversation about how does the industry change,” Ms. Wylde said. “One of the things we were interested in changing was the global image of New York as a center that welcomes entrepreneurs and that we won’t cede that position to Beijing or London or M.I.T.,” she said, referring to the Massachusetts Institute of Technology.

Or Chicago. One new focus of city officials’ attention is maintaining and developing financial exchanges and other infrastructure for the sector. Among the current concerns is catching up to the Chicago Climate Exchange, which is trying to establish itself as the hub for the trading of greenhouse gas emission credits. The New York Mercantile Exchange started trading a few environmental securities last year as a prelude to what it calls the Green Exchange.

The Green Exchange employs only a few people so far and all of the trading on it is expected to be conducted electronically, said a spokesman for CME Group, which owns it. But city officials are more interested in the cachet and magnetism of being the home of what could be the next big thing in trading and finance.

That is why Mr. Bloomberg introduced Barry E. Silbert at a news conference last week. Mr. Silbert, a former investment banker, is the founder and chief executive of SecondMarket, a five-year-old company that creates markets for trading of obscure securities and assets, including claims against Lehman Brothers in bankruptcy court.

Mr. Silbert’s company may never replace more than a handful of the tens of thousands of jobs lost in this downturn, but his attitude about the possibilities is what city officials want to capture and spread.

“Why start a company here?” Mr. Silbert said. “Aside from the robust infrastructure, entrepreneurs come to New York for its most abundant resource: smart, ambitious, innovative people.

“The next chapter in the history of Wall Street is being written right now,” he said. “Never has there been a need for such a cultural and intellectual shift in thinking on Wall Street.”’

the death of the venture-backed IPO

Others have written about it, but for fun/work I put together a compressed version of how the global macroeconomic crisis we’re experiencing ties in with the IPO drought we’re experiencing and the related cracking of the VC model:

There are many accounts of our current global economic crisis – characterized by volatility, dislocation, and market failure – that lay out its historical antecedents and the resultant draught of credit and liquidity—including the specific failure of the IPO markets in the United States.  In quick summary, the world financial markets have been shaken by a collapse of the U.S. mortgage market – especially in subprime – as these problems have destabilized global credit markets, previously inflated on uneven footing.  Global productivity gains over the past 25 years and low central bank lending rates resulted in falling inflation and a low cost of debt.  Easy credit fueled U.S. consumption and deficit-spending which, in turn, led to uptake of U.S. treasures as surplus-earning countries invested in these assets, and this demand in term restrained borrowing rates, thereby sustaining easy credit – the total value of which ballooned.  Access to low-cost credit allowed an expanding base of Americans to purchase homes, and the resulting demand uptake sustained artificially high and growing housing prices.  Accelerating this mortgage credit expansion was the design and distribution of a range of structured products – Mortgage-backed securities (MBS) as a simple example – that allowed default risk to be spread and fixed income rates to be distributed to those most willing to bear their underlying risk.  When housing prices eventually started falling in the United States the music stopped — and credit markets froze.  With no access to credit, significant mortgage default exposure and un-measurable counterparty risk, banks globally began to fail.  These problems cascaded across the business ecosystem, hammering corporate incomes and leading to massive layoffs, further mortgage defaults and declining corporate and consumer spending, culminating in a continued downward economic spiral, the bottom of which we likely have not yet seen.

Even before this cascade became widely recognized, US IPO markets were already in trouble.  Swept upward by the “tech bubble” of the mid-to-late 1990’s, the IPO markets skidded off-course between 2000-2002, as a threefold impact of the tech collapse, 9/11, and a series of corporate governance crises combined to constrain investor appetite for U.S. equities, undermined interest in still-developing business models, and fomented a set of regulatory overhauls that increased the cost of becoming and staying a public company.  Down from their peak level in 1997-99 of hundreds of exits per year, the IPO markets started to recover in 2004-2007, but with the global financial crisis in full-swing, fell to their lowest level in years in 2008 – with only several dozen exits, of which only 7 were for venture-backed companies.  Gone are the days when a company can reasonably expect to get to a public exit (IPO) within 5-6 years—dramatically changing the game for venture funds who had relied on speed-to-exit and portfolio-adjusted risk to support high IRRs and ever-enlarging funds, bequeathed by LPs eager to earn high returns.  Along with this, traditional strategic acquirers – Microsoft, Oracle, IBM, Yahoo, and now Google – have tightened their belts, unwilling to deploy capital in a down economy.  And as limited partners globally seek to rebalance their portfolios in the face of heavily-declining equity markets and a desire to get away from leveraged-based funds (LBOs), venture funds face redemptions that they can’t meet due to longer portfolio company holding periods.  Returns are sagging, capital is skittish about piling into the venture fund class, and as a result a fundamental engine of American innovation – functioning capital markets for early-to-growth stage companies – is idling in neutral.

Thank you Mr. Wilson

Fred Wilson just picked SecondMarket as his #4 wish for the New Year.  Talk about a great late x-mas present.  And for the record, I think I agree with all of 1-5 for that matter!

—

Things I Wish For In The New Year

No predictions for me. I’m done with that thanks to Brad Feld.

And I am also done with resolutions. I resolved to get off of Microsoft products in 2007 and failed miserably.

But I am looking forward to 2009 on this new year’s eve and so I am going to list some things I am hopeful for in 2009. These are in no particular order, they are listed as they came to me.

1) A gas tax – Tom Evslin made the case for a $1.50/gallon gas tax the other day and I totally agree with him. His proposal would be to immediately refund the gas tax in the form of a lower payroll tax so that it doesn’t actually take money out of the economy and people’s pockets. That’s a really good idea. But one way or another we are going to have to make using carbon energy more expensive so that alternative forms of energy and conservation can take hold.

2) An iTouch – I blogged about the iTouch recently. It’s funny because it’s now the number one search term driving traffic from google to this blog (other than my name and the name of this blog). I don’t want to get caught up in whether it can play music or not or whether it has a 9″ screen or not. I just want Apple to come out with an agressively priced touch screen mobile computer that can be used to read books, blogs, watch movies, listen to music, and work as a home remote too. This is a huge opportunity for them and others too.

3) A cultural shift from cars to mobile devices – It’s already happening in Japan. Cars are no longer cool. Bikes, skateboards, scooters, trains, and subways are cooler and the coolest thing is mobile communication devices:

“Young people’s interest is shifting from cars to communication tools like personal computers, mobile phones and services,” said Yoichiro Ichimaru, who oversees domestic sales at Toyota.

We need to follow suit in america. I realize we have a large suburban and rural population and not everyone can make the shift from a car to a bike or train. But even a 10-20% shift in the US would be huge.

OK, those first three are really the same thing. But this is a big deal. The world is changing. We must get on the train before it leaves the station.

4) The development of a real functioning secondary market for private companies – This is another thing I’ve written a lot about. The IPO market is dead. The M&A market is on hiatus for the most part and even when it works, many companies get bought and then slowly die inside the parent company. We need a way for founders, employees, and investors to get liquid on their investments or the whole startup ecosystem is going to get messed up. I am not talking about dumping our shares on widows and orphans. I am talking about a marketplace where seasoned, savvy, and qualified investors can transact in private company shares. The good news is that there’s already one well financed company operating in this space, called Second Market, of course. I am rooting hard for their success and also for anyone else who gets into this business. We need it.

5) An end to the housing slump – House prices are going to drop until they get to a sustainable price level. That price level will be determined by affordability levels (generally 30% of income), a rent vs buy analysis, the availability of credit for investors and/or homeowners, and the amount of foreclosures coming onto the market. It may well be that house prices in the aggregate need to drop another 15-20% before hitting bottom. And it’s also true that some markets are closer to bottom than others. But it’s the housing mess that got us into this economic crisis and I don’t think we can start getting out of it until housing bottoms. So I’d just like to see prices drop to sustainable levels quickly and be done with it.

6) Facebook gets profitable and cash generating – This is not a prediction, as I said, I’m done with that. This is a wish. I think Facebook is a great company and I witness my teenage children using it as I use outlook/exchange/blog/twitter/etc. They run their world on Facebook and I don’t see that changing anytime soon. Facebook now has 200mm unique visitors per month worldwide and it’s growth has picked up again in the US after being flat most of this year. They’ve launched a compelling new service in Facebook Connect. And there are a number of examples of significant new businesses being built on top of its platform. It’s accomplished most of what we’d agree that only the best internet businesses can accomplish. But it has one big dig against it. It’s not profitable and self sustaining. And so it taints the whole social media/social networking sector to some degree. I am hoping that 2009 is the year that Facebook gets serious about revenue, cost control, profitability, and ultimately cash generation. Once they do, I think the whole sector will benefit (and the whole sector should be doing the exact same things for the same reasons).

7) Google starts cutting products and services – This is a bit of the same wish as the last one. But very different in some other ways. Google can do almost anything they put their mind to because they have the engineering resources, the infrastructure, the balance sheet, and the huge revenue stream to support it. But that doesn’t mean they should try to do everything. As a shareholder, as a VC active in the internet market sector, and as a fan of the company, I think Google needs to “rationalize” their business in 2009. I don’t know how much cost they could cut if they really tried to get serious about a Jack Welch/GE style business unit analysis, but I know it would be significant. I wish they’d pick five to ten businesses they want to be number one or two in and invest heavily in them and forget about everything else.

Obama turns out to be a closet conservative – This one is fantasy of course. But Nixon went to china, LBJ brought us civil rights, Clinton eliminated welfare as we knew it, and FDR betrayed his “upbringing” and became the champion of the common man. Hell Sharon was close to bringing peace to the middle east when he was stricken. Anything can happen when someone realizes they work for everyone and everybody and have the world riding on their shoulders. In the case of Obama, I hope he realizes that the world is changing and not every company and industry can be saved, not every worker can keep their old job, and not every problem can be solved with money (money we don’t really have).

9) We all figure out how to do more with less – As I see it, about 40-50% of the world’s wealth was vaporized this year. It’s not even clear that we ever had that wealth. That’s the lesson I learned in 2000/2001 when the gotham gal and I saw 90% of our wealth vaporized. But the fact remains that most of us are a lot less wealthy than we were at the start of 2008. So we’ll just have to figure out how to do more with less. That will mean different strategies for different people, different countries, different regions. But I think that’s where we are a world right now. And I don’t think it’s a bad thing. We’ll adapt, change our ways, and move on. The important thing is we cannot dwell on the loss. You can’t change what you had for breakfast. So don’t try.

That’s it. I stopped at nine to be different. Happy new year everyone. 2008 was kind of sucky with a few notable exceptions. Let’s hope for a better 2009.

Economics Must Reading

My friends think I’m nuts and my family seems to like me less for it, but I’ve spent my last two vacations catching up on my Economics.  In no particular order, a few reviews of the Economics must-reads for the times:

Ascent of Money – Niall Ferguson

Ferguson is one of my favorite historians, hands-down.  His hitiographic approach — international history — seems like an optimal one for tracing the thematic emergence of the most important aspects of our modern financial system: banking; bond markets; share ownership in limited liability companies; credit/money markets; risk management systems — insurance and other hedge instruments.  He also does a great job of capturing many of the more colorful characters involved in these historical developments. 

While I do think this is a must-read for anyone interested in the topic, one nit I have with the book is it’s facile jump from historical examination to an explanation of our current, emerging crisis.  To me, the book both failed to tie its various financial themes together in this current events study, and didn’t give this study the depth required to have these chapters stand as one of the most significant parts of the book.

The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means – George Soros

This was a great paper — but a book it should not be.  Soros’ separation of the housing bubble v. the long-term credit/leverage bubble we’re seeing — and the associated de-gearing we’re experiencing — is useful and extremely well argued.  For these reasons this is a worthy read.  That said, his repetitive intro chapters — how many times does a smart person really need to be introduced to the conecpt of reflexivity?! — and overall lack of coherence from section-to-section really make this a good paper bookended by interesting supporting essays.  If you read it as such you won’t be dissapointed.

The Crash of 1929 – John Kenneth Galbraith

The Great Crash.  Galbraith.  ‘Nuff said.  A history most relevant to what we’re seeing: the vagaries of varying government involvement and de-regulation; investor panic; rampant speculation; non-transparency.  Sound familar?  Read this book.

The Theory of Economic Development – Joseph Schumpeter

I admit I tend Schumpterian — even as Keynsianism seems to be sweeping back into favor.  This is a classic, and an expansion on a set of Schumpeter’s essays that I devoured when I read Growth Economics way back when.   Fluidly written, this book separates and rigorously — and interestingly — examines the key components of an economic growth system: Capital; Interest; Capitalists (risk capital lenders); and Entrepreneurs (process and product innovators — separate of Managers).

Social Security – reliant on technological progress

The fate of Social Security in the US relies on economic growth, especially as enabled by technological progress (by which I mean here specifically the type that crops up in a national growth equation).  Michael Mandel addresses this square on in a recent BW post:

Is Social Security a Ponzi Scheme?

Posted by: Michael Mandel on December 28

(This is the first in a series on technology and the crisis)

In the aftermath of the Madoff implosion, quite a few people have pointed out the parallels between a Ponzi scheme and Social Security. Arnold Kling, whom I respect, has written:

I’ve been thinking that Madoff is a perfect analogy for the public sector. The government gives people money, which it expects to obtain by taking the money from people in the future. Even the Center on Budget Policy and Priorities, not known as a right-wing organization, sees the U.S. fiscal stance as unsustainable (pointer from Ezra Klein via Tyler Cowen)—in other words, a Ponzi scheme.

 
Other people have gone farther. Paul Mulshine of the New Jersey Star Ledger wrote a column entitled “The Ponzi scheme that Baby Boomers are waiting to cash in on.” And Jim Cramer has called Social Security the biggest Ponzi scheme in history.
Superficially, these critics have a point, and there is a parallel between Social Security and a Ponzi scheme. But on a fundamental level, they are very wrong, and it’s worth explaining why.

First, the parallel. Social Security taxes current workers to pay Social Security benefits for current retirees. In other words, the new entrants into the Social Security system, the young workers, pay off the previous entrants, the older workers. And despite the fact you have a Social Security “account”, there is no necessary link between what you paid into the system in taxes, and what you receive.

That’s very similar to the structure of a Ponzi scheme, where new investors pay off the original investors. As long as enough new ‘victims’ are brought into the scheme, it keeps growing and growing. But when the new investors runs out, the Ponzi collapses. Analogously, the slowdown in population growth puts pressure on Social Security finances.

But there is one enormous difference between Social Security and a Ponzi scheme: Technological change. Over the past century, new technologies have enabled the output of the country to grow much faster than its population. To be more precise, the U.S. population has more than tripled since the early 1900s, while the U.S. economic output has gone up by more than 20 times.

This long track record of technology-powered growth has enabled the enormous rise in living standards in the U.S. and other developed countries. In fact, this increase in productivity—output per worker—is the key fact which gives us our way of life today.

Assuming that technological progress continues over the next 70 years, and output productivity growth continues over the next 70 years, the finances of Social Security are relatively easy to fix. A fairly minor cut in benefits, combined with a relatively small increase in taxes, will bring the system back into balance again. (the latest Social Security report projects a 75-year deficit of $4.3 trillion. That sounds like a lot of money, but over 75 years it’s roughly $60 billion a year…not chicken feed, but not overwhelming).

But here’s the rub. Ultimately our ability to make good on the “Ponzi-like” nature of Social Security depends on the continued march of technological progress—and in particular, innovation which boosts output and living standards. If we leave the younger generation a good legacy—a sound scientific and technological base, combined with an innovative and flexible economy and an educated workforce—then Social Security is not a Ponzi scheme. The economy grows, and there’s more than enough resources for everyone.

But if instead we—the current generation—invest in homes, flat-screen televisions and SUVs, then we don’t leave the next generation with the technological “seed corn” they need. If the technological progress slows, then Social Security does turn out to be Ponzi-like—with unfortunate consequences for everyone.

The bane of counterfeit drugs…

I wrote about this in an article through the Hope Street Group earlier this year — these tragedies continue…

Poisoned medicine kills dozens of children in Nigeria

• Story Highlights
• More than 30 Nigerian children have died after being given poisoned medicine
• Nigeria is on the frontline in the global fight against counterfeit drugs
• Counterfeit drug sales predicted to reach $75 billion in 2010

By CNN’s Christian Purefoy

LAGOS, Nigeria (CNN) — Nneka and Chimezie Ononaku unwittingly poisoned their own four-month-old son Chinonso.

Giving him what they thought was a baby teething medicine, they were in fact dosing him with anti-freeze.

The bottle had been contaminated with a toxic chemical called diethylene glycol.

More than 30 Nigerian children are thought to have died recently after taking the medicine.

Nneka is angry.

“It’s not easy carrying a pregnancy for nine months, [and] after that getting a drug from a pharmacy to kill your own child,” she says.

When Nigeria’s Agency for Food and Drug Administration and Control (NAFDAC) tested the medicine, “My Pikin,” the results were terrifying.

It found the medicine contained almost 90ml of diethylene glycol per 100ml.

“It’s a bottle of poison,” the NAFDAC laboratory said.

The “My Pikin” factory’s managing director and eight others have been charged with negligence. The company could not be reached for comment.

Nigeria is on the frontline in the global fight against counterfeit drugs.

Undercover NAFDAC officers have taken to the streets in order to combat unregistered and often harmful drugs. Hawkers are charged with selling counterfeit drugs and forced to pay a fine. Watch more on the poisonings »

NAFDAC claims most of the counterfeit drugs come from India and China.

And it’s big business — America’s Centre for Medicines in the Public Interest predicts counterfeit drug sales will reach $75 billion in 2010.

NAFDAC’s director-general Dora Akunyili warns counterfeiting is not just a Nigerian problem.

“These criminals are cooperating, so we too need to cooperate if we can face them. Not only in Nigeria but internationally, because drug counterfeiting involves a trans-national criminal network and can only be dismantled through international co-operation.”

Intl IP Protection Paper – HSG

Book Review: Moral Consequences of Economic Growth

Just finished reading The Moral Consequences of Economic Growth, by Benjamin Friedman — strongly recommended for anyone interested in the intersection of economics and moral theory, economic growth, and/or political economy.  The short of the story: growth matters — a lot — and we (the U.S., businesses, the world) need to focus more on it.  Steady, incremental improvement (and the opportunity there-to) matters more to more people (shown empirically and qualitatively) in most modern (read, more developed) countries than position relative to the richest or the poorest.  Stagnation — bad; and here we are…

 

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