Nicholle and I have two incomes, two kids, and no time. Not surprisingly we heavily utilize ecommerce sites: Old Navy for clothes, Zappos for shoes, and Amazon for everything (Amazon Prime rocks). We sometimes buy our groceries online, but not that often since delivery windows suck.
Having heard alot about rising unemployment, I mused that ecommerce sites are presumably more efficient with human resources than traditional retail. In other words, we might be exacerbating unemployment via ecommerce.
It turns out Amazon has about 21,000 employees and generates about $19B in revenue. Contrast with Wal Mart, with has about 2,100,000 employees and generates about $400B in revenue. Clearly, Amazon is more efficient per employee. There are probably lots of reasons for this (e.g., different inventories), but blindly extrapolating Amazon could scale to handle Wal Mart's business using only 20% of the employees. That's about 1.5 million people out of work.
Another classic example of automation replacing many low paying less interesting jobs (retail service) with a smaller number of higher paying more interesting jobs (retail site programming), as predicted by Kurt Vonnegut.
Monday, April 27, 2009
Wednesday, April 22, 2009
The Credit Crunch Hits Home (Ownership)
Home ownership is the new whipping boy, not surprising given its central role in the credit crunch. The economist has run several articles questioning the value of home ownership to society, and other opinion outlets are chiming in. The lynchpin of the argument is labor mobility; home ownership decreases it and reduces economic efficiency. This leads to the recommendation to reduce incentives for home ownership in order to better approximate the socially optimal level of home ownership, e.g., reduce or eliminate the home mortgage deduction.
Interestingly, technological developments have been favoring labor mobility. Job search engines make it easier to find the jobs. Social networking lowers the personal cost of moving by making it easy to stay in touch with the people from whom you move away and to get in touch with the people to whom you move toward. Community recommendation sites reduce the cognitive load in becoming an expert in a new area. Mapping sites and GPS technologies mean getting lost is a thing of the past. Rental listing sites makes it easy to find a place to live.
Given these technological advancements, and a weaker domestic labor market due to globalization, I expect that the new generation will be far more mobile than my generation. I do not think telecommuting is a mitigating factor; after all, if you can do the job from Kansas, you can do it from Bangalore, thus physical presence will command a premium. I think the real danger going forward is not oversupply of home ownership, but undersupply. This is doubly true given young people will have the experience of a housing market crash increasing their level of risk-aversion.
Therefore, reducing incentives for home ownership is an improper policy response.
Interestingly, technological developments have been favoring labor mobility. Job search engines make it easier to find the jobs. Social networking lowers the personal cost of moving by making it easy to stay in touch with the people from whom you move away and to get in touch with the people to whom you move toward. Community recommendation sites reduce the cognitive load in becoming an expert in a new area. Mapping sites and GPS technologies mean getting lost is a thing of the past. Rental listing sites makes it easy to find a place to live.
Given these technological advancements, and a weaker domestic labor market due to globalization, I expect that the new generation will be far more mobile than my generation. I do not think telecommuting is a mitigating factor; after all, if you can do the job from Kansas, you can do it from Bangalore, thus physical presence will command a premium. I think the real danger going forward is not oversupply of home ownership, but undersupply. This is doubly true given young people will have the experience of a housing market crash increasing their level of risk-aversion.
Therefore, reducing incentives for home ownership is an improper policy response.
Monday, April 20, 2009
Sailor Capone
Columbian drug-dealers now have their own submarine navies for the purposes of drug smuggling. Adm. James Stravidis, Miami-based U.S. Southern Command, was quoted:
“In simple terms, if drug cartels can ship up to 10 tons of cocaine in a semi-submersible,” Stravidis wrote, “they can clearly ship or ‘rent space’ to a terrorist organization for a weapon of mass destruction.”
Sounds dangerous. Ask yourself, who created the economic incentive for this innovation?
Prohibition 2.0 makes as much sense as pervasive indiscriminatory use of antibiotics; we are literally evolving super-criminals. Today they have their own navies, tomorrow will they have their own space program?
We need to decriminalize it ASAP instead of financing terrorist R&D.
“In simple terms, if drug cartels can ship up to 10 tons of cocaine in a semi-submersible,” Stravidis wrote, “they can clearly ship or ‘rent space’ to a terrorist organization for a weapon of mass destruction.”
Sounds dangerous. Ask yourself, who created the economic incentive for this innovation?
Prohibition 2.0 makes as much sense as pervasive indiscriminatory use of antibiotics; we are literally evolving super-criminals. Today they have their own navies, tomorrow will they have their own space program?
We need to decriminalize it ASAP instead of financing terrorist R&D.
Saturday, April 18, 2009
Full Faith and Credit
As an entrepreneur I like to know which way the wind is blowing. Having heard alot lately about the era of frugality, I thought I'd look into it myself. Fortunately, all the data you can eat about our economy is merely a mouse-click away, which is a good thing given that journalism is dying.
A starting point is the personal savings rate data, courtesy of the commerce department. The trend from the mid-80s right up to the credit crunch was steadily decreasing personal savings rate, which actually dipped negative briefly. Recently it has shot up, although it's a bit difficult to see on this graph. The last few monthly data points are 0.8, 1.4, 2.6, 3.0, 3.8, 4.4, and 4.2. That basically puts us back to where we were in the mid-1990s and well below the savings rate of the 1980s (who knew the decade of greed was so virtuous?). In absolute terms it's not that shocking, although the rate of change has caused alarm.
Desperate to avoid a paradox of thrift, the federal government has stepped in and started spending like a drunken sailor. The US government can really hold its liquor, actually, since with the US debt data from Wikipedia it is easy to see that this is business as usual, except for a brief period of fiscal responsibility in the second half of the Clinton administration. (I've applied the GDP deflator to the data to attempt to normalize the dollar to the year 2000).
So Americans save more individually and the government borrows more collectively; that's the Keynsian playbook, at least for the last 6 months. Prior to the last 6 months, however, we were borrowing heavily at the Federal level and not saving personally, so naturally interest rates increased due to the lack of supply of savings, right? Wrong. Witness the yield on the 30 year treasury bill during this period (that gap in the graph is from when the 30 year was temporarily discontinued).
As Americans saved less and less, the cost of borrowing for the government plummeted (or perhaps the converse?). Here's the treasury yield parametrically plotted against the personal savings rate (the quadratic fit is just phenomenological eye-candy). I colored the most recent data point red just to emphasize this trend has been broken.
Basically foreign liquidity rushed in to fill the gap; while oil-exporting countries would be a reasonable guess as to the source of funds, Asian countries are a larger factor, specifically Japan and China. This global imbalance is at the heart of the financial crisis, leading to basic questions such as: why are developing nations saving so much, and why are they investing their savings abroad?
In any event the future, just like with oil, it is less about the United States and more about the developing world. Arguably, the past two decades were the era of frugality, in a global sense. Previously individual Americans could tap into the global flood of liquidity via instruments such as sub-prime mortgage backed securities, but investors are no longer biting. Currently, however, they are willing to loan to the country collectively (i.e., the federal government). In Q4 2008, investors were literally paying the federal government to hold their money for them. Under these conditions it makes perverse sense for the federal government to borrow heavily. For instance, scaling each year's federal deficit from above by the treasury bill rates over that interval yields something I call the "interest load" (not a standard term).
This indicates that interest rates are so low that even with record budget deficits we will have historically reasonable interest rate payments. Obviously, that could change fast if investors no longer find our federal government a good investment.
If the global era of frugality continues, however, all of us together can borrow much more cheaply than any of us can individually: how best to exploit that? We could arbitrage it directly and have the federal government issue credit cards or offer debt consolidation services (the Obama housing plan bears some resemblance to the latter). Humor aside, retail therapy has a low multiplier value, so the government is going to focus on social services and infrastructure spending.
I implicitly promised a weather forecast at the beginning of this post, so here it is. The global era of frugality will persist in the near term due to inertia, delegating the problem of spending to the US federal government; thus sectors related to public-sector spending will be hot. Americans were defying gravity in the mid-2000s so the personal savings rate cannot go down; but given that standard investment vehicles will be giving tepid returns Americans will not return to mid-1980s savings levels. In this environment the recovery will be soft, the labor market less strong, and taxes higher; therefore I like ideas related to minipreneurship. Etsy-like platforms offer a way to supplement the income of a formerly dual-income (or comfortably retired) household in a work-life balance compatible way for the seller, and offer a low-cost way to achieve a unique retail therapy experience for the buyer. Unfortunately all my ideas for Etsy-style platforms are frustrated by government regulation, but that's a topic for another post.
A starting point is the personal savings rate data, courtesy of the commerce department. The trend from the mid-80s right up to the credit crunch was steadily decreasing personal savings rate, which actually dipped negative briefly. Recently it has shot up, although it's a bit difficult to see on this graph. The last few monthly data points are 0.8, 1.4, 2.6, 3.0, 3.8, 4.4, and 4.2. That basically puts us back to where we were in the mid-1990s and well below the savings rate of the 1980s (who knew the decade of greed was so virtuous?). In absolute terms it's not that shocking, although the rate of change has caused alarm.Desperate to avoid a paradox of thrift, the federal government has stepped in and started spending like a drunken sailor. The US government can really hold its liquor, actually, since with the US debt data from Wikipedia it is easy to see that this is business as usual, except for a brief period of fiscal responsibility in the second half of the Clinton administration. (I've applied the GDP deflator to the data to attempt to normalize the dollar to the year 2000).
So Americans save more individually and the government borrows more collectively; that's the Keynsian playbook, at least for the last 6 months. Prior to the last 6 months, however, we were borrowing heavily at the Federal level and not saving personally, so naturally interest rates increased due to the lack of supply of savings, right? Wrong. Witness the yield on the 30 year treasury bill during this period (that gap in the graph is from when the 30 year was temporarily discontinued).
As Americans saved less and less, the cost of borrowing for the government plummeted (or perhaps the converse?). Here's the treasury yield parametrically plotted against the personal savings rate (the quadratic fit is just phenomenological eye-candy). I colored the most recent data point red just to emphasize this trend has been broken.
Basically foreign liquidity rushed in to fill the gap; while oil-exporting countries would be a reasonable guess as to the source of funds, Asian countries are a larger factor, specifically Japan and China. This global imbalance is at the heart of the financial crisis, leading to basic questions such as: why are developing nations saving so much, and why are they investing their savings abroad?In any event the future, just like with oil, it is less about the United States and more about the developing world. Arguably, the past two decades were the era of frugality, in a global sense. Previously individual Americans could tap into the global flood of liquidity via instruments such as sub-prime mortgage backed securities, but investors are no longer biting. Currently, however, they are willing to loan to the country collectively (i.e., the federal government). In Q4 2008, investors were literally paying the federal government to hold their money for them. Under these conditions it makes perverse sense for the federal government to borrow heavily. For instance, scaling each year's federal deficit from above by the treasury bill rates over that interval yields something I call the "interest load" (not a standard term).
This indicates that interest rates are so low that even with record budget deficits we will have historically reasonable interest rate payments. Obviously, that could change fast if investors no longer find our federal government a good investment.If the global era of frugality continues, however, all of us together can borrow much more cheaply than any of us can individually: how best to exploit that? We could arbitrage it directly and have the federal government issue credit cards or offer debt consolidation services (the Obama housing plan bears some resemblance to the latter). Humor aside, retail therapy has a low multiplier value, so the government is going to focus on social services and infrastructure spending.
I implicitly promised a weather forecast at the beginning of this post, so here it is. The global era of frugality will persist in the near term due to inertia, delegating the problem of spending to the US federal government; thus sectors related to public-sector spending will be hot. Americans were defying gravity in the mid-2000s so the personal savings rate cannot go down; but given that standard investment vehicles will be giving tepid returns Americans will not return to mid-1980s savings levels. In this environment the recovery will be soft, the labor market less strong, and taxes higher; therefore I like ideas related to minipreneurship. Etsy-like platforms offer a way to supplement the income of a formerly dual-income (or comfortably retired) household in a work-life balance compatible way for the seller, and offer a low-cost way to achieve a unique retail therapy experience for the buyer. Unfortunately all my ideas for Etsy-style platforms are frustrated by government regulation, but that's a topic for another post.
Friday, April 17, 2009
The Underbelly of the Internet
My startup makes purchase-cycle prediction models (among other things), meaning that we figure out what people are doing on the internet days, weeks, and months before a purchase; and then we invert that to target advertising.
As part of the testing of the technology, we bought remnant run-of-network inventory on a major ad network and used our model to present Ebay auctions in banner ad space. While the experiment was a success, I am permanently scarred by the experience, since I spent alot of time looking at the sites that we were placed on, and it was not a pretty picture.
The issue was not the content. There were some sites that were either illegal or low value, e.g., video sharing (warezing) sites and automatically generated appropriated content republishers, but these were not typical. Indeed, there were alot of interesting fan sites (e.g., bon jovi, detroit red wings), in addition to real innovation (I discovered failblog.org this way, and they are now a regular source of personal mirth).
The ads were the issue. First, most of these pages' layouts are hellish because they are trying to maximize monetization by having multiple ad units. Second, the ads being shown were at best uninteresting and at worse facilitating fraud. The four ads shown here occurred constantly. We call ads like this "belly fat" around the office, in honor of the one with a stomach pic. You should be thankful that I'm not showing the animated version of the belly fat ad, cycling between the before and after picture.
None of the ad networks are immune to belly fat. Google Adsense might seem like a paragon of virtue but they were the source of the cheddah gets cheddah ads, which are the equivalent of those late night commercials with the guy wearing a suit that has question marks all over it. When Millard calls for an end to the tyranny of the click, I hear "end of belly fat".
If someone has built an interesting website serving an audience of, e.g., Bon Jovi fans, then why are they showing belly fat ads? One problem is that they are too small to attract the attention of advertisers who are interested in that audience; technologies like OpenX market can assist by aggregating these tail publishers and reducing friction. However the problem is not just size, otherwise large publishers like Martha Stewart wouldn't be complaining about the lack of creative innovation in web advertising.
The publisher bears some blame, because they could make the decision to show nothing but rarely do (in defense of publishers, ad networks keep publishers in the dark preventing them from making decisions like this). However I believe the fundamental difficulty is the barge pole problem: quality advertisers cannot embrace the tail of the internet because the landscape is so variable that they risk being potentially associated with content that is unprofessional, offensive, or even illegal. Only belly fat is brave (shameless) enough to wade in, and that makes the situation worse, because who wants to be shown on a site that also shows unethical near-fraudulent ads?
Interestingly, even cable television suffers from the barge pole problem, and cable channels are light-years more elegant than the long-tail of the internet.
As part of the testing of the technology, we bought remnant run-of-network inventory on a major ad network and used our model to present Ebay auctions in banner ad space. While the experiment was a success, I am permanently scarred by the experience, since I spent alot of time looking at the sites that we were placed on, and it was not a pretty picture.
The issue was not the content. There were some sites that were either illegal or low value, e.g., video sharing (warezing) sites and automatically generated appropriated content republishers, but these were not typical. Indeed, there were alot of interesting fan sites (e.g., bon jovi, detroit red wings), in addition to real innovation (I discovered failblog.org this way, and they are now a regular source of personal mirth).
The ads were the issue. First, most of these pages' layouts are hellish because they are trying to maximize monetization by having multiple ad units. Second, the ads being shown were at best uninteresting and at worse facilitating fraud. The four ads shown here occurred constantly. We call ads like this "belly fat" around the office, in honor of the one with a stomach pic. You should be thankful that I'm not showing the animated version of the belly fat ad, cycling between the before and after picture.
None of the ad networks are immune to belly fat. Google Adsense might seem like a paragon of virtue but they were the source of the cheddah gets cheddah ads, which are the equivalent of those late night commercials with the guy wearing a suit that has question marks all over it. When Millard calls for an end to the tyranny of the click, I hear "end of belly fat".
If someone has built an interesting website serving an audience of, e.g., Bon Jovi fans, then why are they showing belly fat ads? One problem is that they are too small to attract the attention of advertisers who are interested in that audience; technologies like OpenX market can assist by aggregating these tail publishers and reducing friction. However the problem is not just size, otherwise large publishers like Martha Stewart wouldn't be complaining about the lack of creative innovation in web advertising.
The publisher bears some blame, because they could make the decision to show nothing but rarely do (in defense of publishers, ad networks keep publishers in the dark preventing them from making decisions like this). However I believe the fundamental difficulty is the barge pole problem: quality advertisers cannot embrace the tail of the internet because the landscape is so variable that they risk being potentially associated with content that is unprofessional, offensive, or even illegal. Only belly fat is brave (shameless) enough to wade in, and that makes the situation worse, because who wants to be shown on a site that also shows unethical near-fraudulent ads?
Interestingly, even cable television suffers from the barge pole problem, and cable channels are light-years more elegant than the long-tail of the internet.
Thursday, April 16, 2009
Green cars not just for hippies anymore
The price of oil has ranged from $40 to $150 per barrel over the past 18 months. According to the IEA, world oil demand ranged from 82.5 to 87 million barrels per day during this interval. That's a 5% change in demand and a 300% change in price.
High oil prices have spurred alot of discussion, reviving peak oil and it's new cousin plateau oil. I think the more interesting and less controversial observation is significant economic growth cannot happen unless either the supply of oil is increased, or demand of oil per unit GDP is reduced. Otherwise, when the world economy recovers, oil demand will increase by 5%, causing a 300% increase in prices, causing the world economy to stall. (I highly recommend watching Shai Agassi's electric vehicle proposal although I am skeptical about his particular solution).
The last time we had an oil shock was the 1970s, and since that time we have decreased the use of oil for generating electricity, which was one factor in improving our GDP per barrel of oil (we did this by cheating a bit, since we replaced oil with natural gas and coal, mostly). Since then we've been getting increasingly efficient in terms of GDP per barrel, despite the popularity of SUVs. However we've had substantial economic growth so we actually returned to our 1970s peak of usage near the turn of the century and have since eclipsed it. In addition the rest of the world has increased their use of oil, in particular China, which has gone from 2 to 7 billion barrels per day during this period.
About 45% of our oil use is for personal transportation, so we can make substantial progress by improving our automobiles. We will not experience another Great Moderation until we do so.
High oil prices have spurred alot of discussion, reviving peak oil and it's new cousin plateau oil. I think the more interesting and less controversial observation is significant economic growth cannot happen unless either the supply of oil is increased, or demand of oil per unit GDP is reduced. Otherwise, when the world economy recovers, oil demand will increase by 5%, causing a 300% increase in prices, causing the world economy to stall. (I highly recommend watching Shai Agassi's electric vehicle proposal although I am skeptical about his particular solution).
The last time we had an oil shock was the 1970s, and since that time we have decreased the use of oil for generating electricity, which was one factor in improving our GDP per barrel of oil (we did this by cheating a bit, since we replaced oil with natural gas and coal, mostly). Since then we've been getting increasingly efficient in terms of GDP per barrel, despite the popularity of SUVs. However we've had substantial economic growth so we actually returned to our 1970s peak of usage near the turn of the century and have since eclipsed it. In addition the rest of the world has increased their use of oil, in particular China, which has gone from 2 to 7 billion barrels per day during this period.
About 45% of our oil use is for personal transportation, so we can make substantial progress by improving our automobiles. We will not experience another Great Moderation until we do so.
Tuesday, April 14, 2009
School Choice
I'm pro-choice ... pro school choice, that is.
I'm passionate about school choice so I get into many heated debates about it. Here are some common objections I encounter along with my responses.
It's just a way to subsidize the rich leaving the public school system. Certainly a poorly structured voucher system would have this property, so let's make vouchers large enough to matter (e.g, $20,000 per year), and mandate that acceptance of the voucher constitutes complete payment (i.e., no additional tuition allowed).
It would lead to balkinization. Common fears include promoting racial segregation or the teaching of creationism. I would prevent this by holding voucher receiving institutions to the same curriculum and admissions requirements as public schools.
People are unable to make this decision. Sometimes I hear claims that the working poor are too busy for the cognitive load this decision demands. No one is brazen enough to admit to me that they think people are just plain too stupid to make this decision, although I suspect they think so. Even if you grant that, a reasonable automatic default works well for 401K plans and could work here as well (i.e., default to the geographically closest public school, since public schools can still take vouchers). I also suspect that many low income parents would find the time to research their children's education.
Special needs children would be neglected. So let's let the voucher system reflect the increased costs of educating special needs children. For instance, one certified special needs, the size of the voucher could double to $40,000 per year.
I'm throwing around some big numbers for the vouchers, but I'd be willing to pay vastly more in taxes for education if the tax increases were combined with significant reform. Fundamentally I think education is an excellent investment for society, not just in pure economic terms but also for the health of our democracy. However my wife is a former elementary school teacher (now a practicing attorney), and the inside look at the public school system I got during her tenure convinced me that the current system is unable to effectively absorb a radical increase in funding without systemic overhaul.
I'm passionate about school choice so I get into many heated debates about it. Here are some common objections I encounter along with my responses.
It's just a way to subsidize the rich leaving the public school system. Certainly a poorly structured voucher system would have this property, so let's make vouchers large enough to matter (e.g, $20,000 per year), and mandate that acceptance of the voucher constitutes complete payment (i.e., no additional tuition allowed).
It would lead to balkinization. Common fears include promoting racial segregation or the teaching of creationism. I would prevent this by holding voucher receiving institutions to the same curriculum and admissions requirements as public schools.
People are unable to make this decision. Sometimes I hear claims that the working poor are too busy for the cognitive load this decision demands. No one is brazen enough to admit to me that they think people are just plain too stupid to make this decision, although I suspect they think so. Even if you grant that, a reasonable automatic default works well for 401K plans and could work here as well (i.e., default to the geographically closest public school, since public schools can still take vouchers). I also suspect that many low income parents would find the time to research their children's education.
Special needs children would be neglected. So let's let the voucher system reflect the increased costs of educating special needs children. For instance, one certified special needs, the size of the voucher could double to $40,000 per year.
I'm throwing around some big numbers for the vouchers, but I'd be willing to pay vastly more in taxes for education if the tax increases were combined with significant reform. Fundamentally I think education is an excellent investment for society, not just in pure economic terms but also for the health of our democracy. However my wife is a former elementary school teacher (now a practicing attorney), and the inside look at the public school system I got during her tenure convinced me that the current system is unable to effectively absorb a radical increase in funding without systemic overhaul.
Monday, April 13, 2009
Hot Lattes
Coffee sex shops reminds me of Idiocracy.
Notwithstanding the above, people actually appear to getting more intelligent over time, a phenomenon called the Flynn Effect.
Notwithstanding the above, people actually appear to getting more intelligent over time, a phenomenon called the Flynn Effect.
Advertising is dead; long live advertising
I've been reading alot about the future of advertising lately, mainly because I'm thinking about the future of my startup.
On one end of the spectrum, some are saying that advertising will cease to exist. Of course, now we need to define advertising, because no one is predicting an end to commerce or marketing. "Advertising" in this context refers to unsolicited awareness-based marketing. The argument is that the same advances in communication technology that make it easy for anybody to blog to everybody imply that vendors can easily reach target consumers. In addition, since unsolicited interstitial advertising no longer works, tools and process will arise that make it easy for customers to find vendors that meet their needs (the beginnings of the trend visible in Google, Yelp, Amazon, etc.). In this glorious future (present?), media companies whose business model is based upon audience aggregation and collocation of content and advertising cannot survive. Heads up: when ads fail, you're going to have to start paying for professionally produced stuff. In some domains, perhaps, amateur stuff will be so good we won't notice or care (aside: Kutiman is a professional producer), but it does seem some genuine problems will be created.
On the other hand are those who say any talk of the end of advertising is at best too premature to be useful. The real change underway as audiences move online is towards measurability. Direct response advertising is emininently measurable so much of the early advertising activity on the internet has (obsessively?) focused on direct response, but this view ignores other value that advertising can generate. If you are an artistic type, you want to break out of the direct response straightjacket and have another creative revolution. If you are a math type, you either work with a direct response vehicle that facilitates brand awareness, or you want to find a way to make branding measurable. The latter can literally mean mindreading, data mining techniques, or fancy focus group techniques.
I certainly believe that the industry in trending towards measurability; it's why I'm in this business. However I suspect that historically advertisers have overpayed for marketing, and are now entering a period where they will underpay: a multi-decade hype cycle, if you will. In Seth Godin's terms, we are switching from a period of "glamorous" ad buying to "rational" ad buying. Ultimately, advertisers will converge to the proper level of spending, but from below, and to entice them towards optimal spend the industry will have to find a way to relate all marketing activity to ROI. It is only when measurability has been conquered that the next creative revolution can truly start, because only then can the value of a great advertisement be understood.
On one end of the spectrum, some are saying that advertising will cease to exist. Of course, now we need to define advertising, because no one is predicting an end to commerce or marketing. "Advertising" in this context refers to unsolicited awareness-based marketing. The argument is that the same advances in communication technology that make it easy for anybody to blog to everybody imply that vendors can easily reach target consumers. In addition, since unsolicited interstitial advertising no longer works, tools and process will arise that make it easy for customers to find vendors that meet their needs (the beginnings of the trend visible in Google, Yelp, Amazon, etc.). In this glorious future (present?), media companies whose business model is based upon audience aggregation and collocation of content and advertising cannot survive. Heads up: when ads fail, you're going to have to start paying for professionally produced stuff. In some domains, perhaps, amateur stuff will be so good we won't notice or care (aside: Kutiman is a professional producer), but it does seem some genuine problems will be created.
On the other hand are those who say any talk of the end of advertising is at best too premature to be useful. The real change underway as audiences move online is towards measurability. Direct response advertising is emininently measurable so much of the early advertising activity on the internet has (obsessively?) focused on direct response, but this view ignores other value that advertising can generate. If you are an artistic type, you want to break out of the direct response straightjacket and have another creative revolution. If you are a math type, you either work with a direct response vehicle that facilitates brand awareness, or you want to find a way to make branding measurable. The latter can literally mean mindreading, data mining techniques, or fancy focus group techniques.
I certainly believe that the industry in trending towards measurability; it's why I'm in this business. However I suspect that historically advertisers have overpayed for marketing, and are now entering a period where they will underpay: a multi-decade hype cycle, if you will. In Seth Godin's terms, we are switching from a period of "glamorous" ad buying to "rational" ad buying. Ultimately, advertisers will converge to the proper level of spending, but from below, and to entice them towards optimal spend the industry will have to find a way to relate all marketing activity to ROI. It is only when measurability has been conquered that the next creative revolution can truly start, because only then can the value of a great advertisement be understood.
Saturday, April 11, 2009
The Best of Both Worlds
Segway, not content to be bigger than the PC, is now teaming up with GM to save the American auto industry.
Which reminds me ...
GM's North American operations have to get much smaller to be viable. From a macroeconomic perspective, it would be a good thing for that happen quickly and without incident. The problem is that many real people work at GM and its suppliers. Compassion aside, asking these people to "suck it up" is not efficient, since people will resist changes that are obviously not in their best interests through the political process.
Americans accepted the risks associated with an efficient labor market during times of prosperity, but as unemployment rises we can expect a backlash. France is the prototype of runaway labor populism, and the resulting high unemployment has explosive consequences. Can we avoid this fate?
Enter Flexicurity. Pioneered by the Nordic countries, it is a combination of a flexible labor market (like America), a generous social safety net (not like America), and responsibilities for the unemployed to continue receiving assistance (even more stringent than America).
I like the idea of getting workers out of obsolete jobs as fast as possible; otherwise, it's a waste of human capital. By providing a generous social safety net, we can improve the alignment of incentives between citizen and society. While I expect there will be fraud and abuse, ultimately, the inefficiencies from defrauding generous welfare have to be balanced against the inefficiencies that result from other policy choices, such as handcuffing businesses in the labor market.
Since we cannot afford our current entitlements, I'm willing to pay more taxes for policies based upon flexicurity. This is not despite the fact that the labor market for my particular skills is strong and should stay so during my working lifetime, but because of it. I'm going to pay for the curity whether or not I directly need it: protectionism, subsidies, and distorting incentives will get me if taxes don't. I'd rather the goal of sustainable labor market efficiency be tackled directly, so that I can benefit from the flex via higher wages, meritocracy over seniority, and increased job choices.
This line of thinking forces me to be in favor of some kind of health care reform. Currently I prefer a Mccain style plan to adjust the tax code, rather than what Obama has been proposing lately.
Which reminds me ...
GM's North American operations have to get much smaller to be viable. From a macroeconomic perspective, it would be a good thing for that happen quickly and without incident. The problem is that many real people work at GM and its suppliers. Compassion aside, asking these people to "suck it up" is not efficient, since people will resist changes that are obviously not in their best interests through the political process.
Americans accepted the risks associated with an efficient labor market during times of prosperity, but as unemployment rises we can expect a backlash. France is the prototype of runaway labor populism, and the resulting high unemployment has explosive consequences. Can we avoid this fate?
Enter Flexicurity. Pioneered by the Nordic countries, it is a combination of a flexible labor market (like America), a generous social safety net (not like America), and responsibilities for the unemployed to continue receiving assistance (even more stringent than America).
I like the idea of getting workers out of obsolete jobs as fast as possible; otherwise, it's a waste of human capital. By providing a generous social safety net, we can improve the alignment of incentives between citizen and society. While I expect there will be fraud and abuse, ultimately, the inefficiencies from defrauding generous welfare have to be balanced against the inefficiencies that result from other policy choices, such as handcuffing businesses in the labor market.
Since we cannot afford our current entitlements, I'm willing to pay more taxes for policies based upon flexicurity. This is not despite the fact that the labor market for my particular skills is strong and should stay so during my working lifetime, but because of it. I'm going to pay for the curity whether or not I directly need it: protectionism, subsidies, and distorting incentives will get me if taxes don't. I'd rather the goal of sustainable labor market efficiency be tackled directly, so that I can benefit from the flex via higher wages, meritocracy over seniority, and increased job choices.
This line of thinking forces me to be in favor of some kind of health care reform. Currently I prefer a Mccain style plan to adjust the tax code, rather than what Obama has been proposing lately.
An Economic Theory of Dirty Dishes
The dishes really piled up last week. I attribute it to an era of frugality inspired batch of late night bulk cooking, which generated a bunch of large dirty pots which we would clean in the morning. It never happened, and it wasn't until this weekend that we finally got a handle on it. I was reminded of my theory of dirty dishes however.
The theory basically says that the marginal cost of cleaning a single dish is essentially constant, but that the marginal utility of cleaning a single dish decays as a function of the total number of dirty dishes. (This is because, when are there are many dirty dishes, there is little sense of progress on each one.) Therefore, if a spike in the number of dirty dishes occurs, the equilibrium supply of dirty dishes becomes trapped away from zero. The only way out is to wait for the marginal cost of cleaning a dish to fall, i.e., for the weekend to show up so that you are feeling less lazy.
But hey, a picture is worth a thousand words right? Let's assume you have 10 dishes, and a sink that holds 6 dishes, and can hold 2 without the dishes being visible from afar. Then a model
of the utility of a particular state of the kitchen is given by the silly picture. (Not captured: once all dishes are dirty, there is some utility to have a clean dish when you need to eat something.) This implicitly represents the demand for clean dishes: points where the slope of this curve are high correspond to states of the kitchen where you would pay the most to have a dish cleaned.
Of course by paying I mean actually cleaning something. I model the cost of cleaning one dish as roughly independent of the number of dirty dishes; instead it varies over time based upon psychological factors such as exhaustion and alternate uses of time at the current moment. There are economies of scale, however: the cost of cleaning subsequent dishes falls rapidly since one is "in the zone". For simplicity, I'll model the cost of cleaning subsequent dishes as zero. Therefore, the decision to do all the dishes hinges upon whether the marginal utility of doing one dish is sufficiently great. Since our unit of utility is arbitrary, I'll just say the units are "cleaning 1 dish". In this case, we only need the one silly graph I've already produced above, with the understanding that it will scale greatly for different people, or even for the same person at different times of the week.
So the theory admits several outcomes merely by scaling the above graph, including equilibrium at all dishes dirty (aka college), all dishes clean, and some dishes clean. Importantly there is a range where you normally manage to keep all the dishes clean, but if you experience a black swan in the number of dirty dishes you can get permanently behind. Since this dynamic happens for more than dirty dishes, this argues for having an infrequent housekeeper visit, e.g. biweekly, to prevent undesirable absorbing states.
It also makes one interesting testable prediction: you can get your spouse to clean more dishes by hiding most of the dirty dishes, and producing them only when they start to clean them. I'll be trying that one out on Nicholle.
The theory basically says that the marginal cost of cleaning a single dish is essentially constant, but that the marginal utility of cleaning a single dish decays as a function of the total number of dirty dishes. (This is because, when are there are many dirty dishes, there is little sense of progress on each one.) Therefore, if a spike in the number of dirty dishes occurs, the equilibrium supply of dirty dishes becomes trapped away from zero. The only way out is to wait for the marginal cost of cleaning a dish to fall, i.e., for the weekend to show up so that you are feeling less lazy.
But hey, a picture is worth a thousand words right? Let's assume you have 10 dishes, and a sink that holds 6 dishes, and can hold 2 without the dishes being visible from afar. Then a model
of the utility of a particular state of the kitchen is given by the silly picture. (Not captured: once all dishes are dirty, there is some utility to have a clean dish when you need to eat something.) This implicitly represents the demand for clean dishes: points where the slope of this curve are high correspond to states of the kitchen where you would pay the most to have a dish cleaned.Of course by paying I mean actually cleaning something. I model the cost of cleaning one dish as roughly independent of the number of dirty dishes; instead it varies over time based upon psychological factors such as exhaustion and alternate uses of time at the current moment. There are economies of scale, however: the cost of cleaning subsequent dishes falls rapidly since one is "in the zone". For simplicity, I'll model the cost of cleaning subsequent dishes as zero. Therefore, the decision to do all the dishes hinges upon whether the marginal utility of doing one dish is sufficiently great. Since our unit of utility is arbitrary, I'll just say the units are "cleaning 1 dish". In this case, we only need the one silly graph I've already produced above, with the understanding that it will scale greatly for different people, or even for the same person at different times of the week.
So the theory admits several outcomes merely by scaling the above graph, including equilibrium at all dishes dirty (aka college), all dishes clean, and some dishes clean. Importantly there is a range where you normally manage to keep all the dishes clean, but if you experience a black swan in the number of dirty dishes you can get permanently behind. Since this dynamic happens for more than dirty dishes, this argues for having an infrequent housekeeper visit, e.g. biweekly, to prevent undesirable absorbing states.
It also makes one interesting testable prediction: you can get your spouse to clean more dishes by hiding most of the dirty dishes, and producing them only when they start to clean them. I'll be trying that one out on Nicholle.
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