Quote of the Day

"So economic crystal ball-gazing remains unscientific. The trend is the forecaster's friend. Extrapolation assumes that the future will be like the past, only more so. We project current preoccupations - the rise of China and India, global terror, climate change - with exaggerated speed and to an exaggerated degree." John Kay

A lesson that I hope many economists and business professionals could internalize especially in regard to assumptions about China's inevitable growth at the same pace as today.

Tiger Woods Severs Deal with General Motors

Nobody would argue that Tiger Woods not only is a skilled athlete but that he deploys his personality and charisma well enough to draw audiences and attention to the events that he appears in. In addition, he is an undeniably powerful marketing symbol for a host of corporations. In spite of that drawing power and name recognition, it appears that even Tiger Woods could not save General Motors. As reported by here in the Guardian and other media, Tiger Woods has acceded to the request to end a sponsorship deal worth US$ 10 million annually.

Again, it is unsurprising that corporations are so enchanted with celebrities that they are unwilling to consider whether there is real value in attaching a name to a product. Endorsement deals are probably useful but the design of the payment scheme should be such that it is based on real improved sales that can be attributed to the endorsement. A ten year contract such as this is obviously not the best way to promote sales for the Buick.

The moral of this story: it is not enough to have one of the most recognizable athletes to promote cars that few people wish to buy. I am sure that this common sense dictum is one that many marketing executives tend to be oblivious of and wish that their clients do not notice. At a more cynical level, what really is the value added by endorsements?

NetFlix Prize a Case Study in Incentives for Innovation

The use of prizes to drive innovations is an idea that is not exploited as much as it should. One corporation that has put this idea to the firmest of tests is Netflix which put out an announcement to award the Netflix Prize of US$ 1 million to any individual or team which would draw an algorithm that would improve its ability to predict the movies that its customers would like by 10% from an existing level. A good number of teams using sophisticated mathematical and reasoning techniques have been crunching the numbers to since 2006.

Generating an improvement of 10% sounds easy until one finds that the last mile is the most difficult. NYT Magazine’s columnist, Clive Thompson traces the interesting experiment here and reports on some of the contenders for the prize, in addition to the frustrations faced by the competing teams as they try to reach the last rung. The difficulty of the task is discernible from the fact that the top team has gone through close to 95% of the tasks and yet the ultimate formula has not yielded.

For any student of applied economics, it is interesting to note that the corporation defined the task by building in one large ultimate prize and periodic prizes to keep the motivation of the teams. Secondly, the information that each team generates is soon available to the others and that helps to increase the overall amount of knowledge that is generated. The most fascinating fact though is that a number of teams are comprised of professionals who work on the problem on a part time basis or teams constituted in academia.

While I am neither good with models nor writing computer code, I intend to enter the contest on my own just so I may gain access to that interesting database of movies. I think that it can be used in many more ways than just cracking the 10% improvement threshold.

This Netflix approach is not new in principle but the results will perhaps change public views on how longstanding technical problems could be tackled. Regarding the subject here, I venture that one of the teams will crack the threshold before the prize expires.

Basing Vaccine Administration on Samples

One of the greatest ideas in biological and medical sciences is the development of vaccines. I stand in awe of the effectiveness of vaccines especially since the idea behind their development is for me rather simple though counter-intuitive.

In this story in Slate Magazine, Sydnet Spiesel makes the case for the administration of flu vaccines on a regular basis because new strains emerge predictably. As a result, the vaccines developed for the year before are not as effective subsequently.

While the logic behind the argument for vaccination of the most vulnerable is fairly solid, I am less convinced that universal vaccination is necessarily cost-effective. As piece argues, the benefits for vaccinations come from reduced mortality, reduced hospitalization and a reduction in deaths for the most vulnerable. However, noting that vaccinations for influenza provides herd immunity in the sense that the vaccinated are less likely to pass the disease or become ill, then it is perhaps less efficient to vaccinate all.

The critical factor then is to determine the proportion of a population that would need vaccination and ensure that the greatest number are protected. This would require knowledge of the demographic profile of the population and to concentrate the vaccines to those most vulnerable on the one hand and those who are the most efficient spreaders. I argue that this would require vaccination by sampling and determining the most appropriate moments for administering the vaccines to the distinct cohorts in the overall sample.

Lessons from Leyland Bailout

I have stated in this blog that while I was sympathetic to the decision by the US congress to support existing financial institutions in order to strengthen the finabcial system, I feared that over time, that it would be difficult to draw a firm line on who is allowed to fail. Indeed, the US congress, the outgoing administration and the incumbent administration are debating whether GM, Ford and Chrysler qualify to be supported now.

My inclination is not to spend public funds to support these firms for the reasons stated in this blog post. I stated then that there are arguments for supporting the Detroit automobile manufacturers for the reason that they are intertwined with other industries and are also sizable employers. Having reviewed the posts and other debates, I conclude that most of the debates have been entirely from an ideological standpoint.

Reading this piece by Nelson Schwartz in the NYT today, I have been reminded that bailouts of this nature and size for automobile firms is not a new thing. Schwartz looks back on the difficult decision by the British Government during the 1980s in attempting to rescue Leyland. As he states, the same reason as a are given today were stated in justification for the bailout. As he states, this lesson is critical because the corporation was so poorly and its management so utterly incompetent that they failed to realize that some exported models lost the equivalent of US$ 2000 each. In spite of the very best efforts and large financial resources by Thatcher’s team, the corporation was not saved. On the other hand, the French government took a different direction regarding Renault and managed to preserve its existence after infusing cash and replacing its management.

Chris Kelly’s piece in the Huffington Post here argues against the bailout entirely on grounds of principle. In his view, the inclination to bailout the firms is unconvincing because they are not the only firms in the US automobile industry today. Given that Honda has been based in the US for almost 25 years now, the quest to rescue the Detroit three is about nostalgia and nativism. Chrysler is also a private equity firm with other properties and should consider disposing of those instead of seeking public financing while it has cash rich assets.

In sum, there’s a good chance that in spite of what congress and the new administration does, the bailout may come too late and result in the waste of public money. On the other hand, the automobile industry is perhaps already different and the dominance of the Detroit three may have reached its zenith a long time ago. The rescue of any among them could still occur but they would probably never acquire industry leadership status. Given the very real possibility of throwing good money after bad, the bailout should not go ahead and the firms should seek Chapter 11protection or infusion of private cash.

Blackberry should take Presidential Challenge

It was very widely stated that Barack Obama was the more technology savvy of the two presidential candidates in the last US elections. Suzanne Goldenberg's piece here suggests that the Oval office has no need for such electronic communication and that president Obama will have to eschew the use of his Blackberry communications device as soon as he takes office in January 2009.

I find it not only surprising that the manufacturers of the device are prepared to let go of the suggestion that the Blackberry is insufficiently secure to qualify as a communication device for a president. While , I have read enough pieces from Bruce Schneier to know that no device is completely secure, I am still surprised that for all the technological capability of the US, the view that electronic communication is insecure is taken with little challenge.

To my mind, paper communications may be important for keeping records but there's no reason that electronic communications devices cannot have a similar facility or permanent record. It is in the interest of the firm that manufacturers and supplies the software for Blackberry to state this clearly by taking the challenge to pay US$ 1 million to anyone who could demonstrate that interception of communications from a given device (not the president's)was possible. Blackberry ought not to let the image of its product be that it is only good for a suave campaigner who must leave it aside as soon as elections are over. Taken to its most extreme, does this suggest that Blackberry's are only for the non-presidential and the losers. Thus far, it appears that only losers keep their Blackberry!

Bankruptcy or Bailout?

The post that preceded this one summed up the main reasons that the Detroit three manufacturers are in danger of collapse. As stated then, their coziness with elected officials ensured that they were protected to death and were not therefore placed under pressure to produce vehicles that were fuel-efficient. Their Japanese competitors appeared to have taken this into account and are selling substantial numbers of vehicles in the US and throughout the world.

That the three main vehicle manufacturers made the wrong bets is clear but the debate has just commenced about how to respond to the possibility of their collapse. Indeed, president-elect Obama appears to be asking for the presentation of a bailout of the firms. The second choice is to allow them to consider the possibility of bankruptcy proceedings or to be left to their devices with the possibility of their quick collapse and the attendant loss of jobs.

David Brooks in the New York Times here, takes the very reasonable and my favoured view that to save the corporations will not only result in moral hazard that failure is intolerable, but also entrench the influence of these firms with the public sector. On the other hand, while Daniel Gross admits in this article that the management of the three firms are culpable, he is concerned that the mechanics of Chapter 11 would be inappropriate for the firms. As he states, the nature of the vehicle manufacturers is that they are connected to many other firms that would in turn be forced to close and trigger other closures down the line.

In all this, I think that the domino effect is overstated and that the firms ought to be left to their devices. The arguments about the financial sector bailout found more sympathy with me than the argument that the automobile industry is also a very critical part of the US economy. Simply put, if any of these firms were to go into bankruptcy, most US citizens will still be able to find vehicles to drive through the imperative of competition. And yet it appears that the bailout will occur. As David Brooks says, this may be a bailout to nowhere.

How US Protected Detroit to Death

During my brief visit to the Us a couple of years ago, I was on the watch for the kind of cars that were most available. The reason being that I had made crude comparisons and even after adjusting for PPP, determined that petroleum is incredibly cheap in the US as compared to Europe. I noted that there was a large and growing number of Japanese models side by side with the impressive looking but fuel guzzling SUVs.

I found this fascinating because the connection between the addiction to oil and security has been eloquently made by Thomas Friedman. Writing this piece in the NYT, he extends the theme by showing how the three main car manufacturers in the US relied on connections in congress to ensure that they would not adjust to Japanese competition and to provide more fuel-efficient vehicles. In spite of the heavy protection received from some congressmen, it is clear that the rise in petroleum prices has shifted demand away from the models that GM, Chrysler and Ford presently produce almost irreversibly. The managers of these corporations are compelled to plead for government subvention to ensure their survival. In essence, the car manufacturers are close to being nationalized.

The moral of the story is that government should not contemplate protectionism to begin with because it builds the power of corporations to ask for more help later. As their world unraveled, the corporations were so confident of their ability to manipulate congress that they refused to back a health care plan that would have substantially reduced their wage costs. In the writer's reckoning, the Detroit corporations now need an equivalent of or the real Steve Jobs and more competition from Japanese manufacturers. I would welcome an icar too.

Healthy Town Intiative is Unhealthy

Everyone should strive to maintain good weight, eat wholesome food and enjoy an active life to burn any excess calories. While all this is laudable, I am strongly inclined to the view that it all remains within the domain of personal behaviour. It seems that the city of Manchester in the UK, among other local governments have completely bought into the panic created by a supposed obesity epidemic and are now spending public money in the quest to encourage healthy living to limit obesity.

The Healthy Towns initiative reported here is unworthy of the name purely on two grounds. First is that if the intention is to encourage healthy eating, then it is poorly designed. This is because everyone who purchases the favoured foods will receive this subvention even if they do not require it. Secondly, the scheme is unduly complicated and will obviously lead to unintended consequences arising from the adjustments to infrastructure and the expected demand for bikers. The programme's overall costs will go beyond the £30 million that is its face value. There's no reason to believe that people who are not inclined to take up cycling in the first place will do it in addition to starting a gardening project in the backyard.

Since the nine cities are keen to spend money, they should start by reading this earlier post and contacting the mayor of Varello. My advise would be to forget the loyalty programme and pay residents for real weight loss as opposed to paying for activity that may lead to weight loss. Even the mayor of a small and obscure town in Italy knows that.

Economics of Capturing Stray Cattle

A visitor to either of India's cities of New Delhi and Mumbai is wont to notice the number of freely roaming cows. It is understandable that the Hindu faith has enormous regard for the animal and has accorded it a sacred place. However, given that these animals fall easily within the province of private property, one can easily see that their owners would be given to free ride on the dispensation and bearing no cost for it. The result would be predictable: too many stray cattle in the streets.

Jeremy Khan writes here about the efforts by the city of New Delhi to capture stray animals and take them off the streets where they cause traffic problems in addition to the leaving dung on the city pavements. Interestingly, the city has responded by hiring about 165 cow catchers who are obliged to bring about 10 cows per day. Impliedly therefore, they capture 1650 cattle per day. Allowing for the mishaps and allowing for a slovenly work rate of 5 captured cows per worker, the deprtament should clear New Delhi's streets of virtually all the 32,000 stray animals within forty working days.

It is easy to see that the incentives borne by the catchers is inconsistent with this rate of work because the clearance of the cows from the streets would render them without jobs. No wonder the story reports that a number of cows have been caught multiple times. It is clear that the city of New Delhi has designed the incentives around the removal of the stray animals poorly.

Who Delivers the Coming Concession Speech?

Its late in the day to pretend to be making predictions but Intrade defines it for me. I think that in spite of my reservations in respect to information markets, this chart is right and 44 will be Barack Obama. Congratulations to a competent campaigner who fully deserves his victory.

Finding Profits for Facebook

A substantial part of the world wide web is available to information searchers and surfers at no cost to the consumer of that information or service. I have therefore wondered how come very few purely web-based businesses are able to make sufficient money to sustain their activities. A leading example for me is Facebook and other social network sites that have millions of users but are yet to make any cash for their investors and developers.

Farhad Manjoo writes in the Slate Magazine that a large number of these businesses are in dire need of a plan to ensure that they make some money. This may run counter to the natural instinct of most Internet businesses which insist on developing a fine product and thereafter seek a revenue model. It is often stated clearly that Google's founders were not overly interested in its commercial applications until they became certain that it was the top search engine. While this model appeared to have worked well for Google, I do not see any reason for the assumption that this is the most appropriate model for Facebook. As the writer suggests, the institution of a payment model may lead to the reduction of clients but it would have the advantage of demonstrating to the developers whether the service has much value at all.

To my mind, no approach is necessarily better than the other and the model adopted by Google is prudent for the service that was new and one that requires numbers upfront so that advertising can be sold. It is not clear that social interaction sites would succeed in the same way. What happens when they start to charge?