Silo Thinking

By now, you may have figured out that my last few blogs were inspired by the recent book Thinking, Fast and Slow of Professor Daniel Kahneman, a trained psychologist and a co-recipient of 2002 Nobel Prize in Economics.  The Prize citation recognized him "for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty."  

Along with many researchers and thinkers, Kaheman has been making significant contributions to the field of what is now known as Behavioral Economics that “study the effects of social, cognitive and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns and the resource allocation.”  

You may wonder if main stream economists did not incorporate the effects of social, cognitive and emotional factors, what was the economic decision theory like and how good are they?  In his book, Professor Kahneman recalls how he got involved in the study of decision making.  It all started one day in early 1970s when late Amos Tversky, Kahneman’s collaborator and close friend, showed him an essay that started with the sentence “The agent of economic theory is rational, selfish, and his tastes do not change.”  The statement is a concise summary of one key assumption of the dominant neoclassical economics theory and rationality in this context means “an individual acts as if balancing costs against benefits to arrive at action that maximizes personal advantage.”

What is interesting is the ensuing “what?!” moment.  As Kahneman recalls “To a psychologist, it is self-evident that people are neither fully rational nor completely selfish, and that their tastes are anything but stable.  Our two disciplines seemed to be studying different species....”  A Nobel prize-worthy work was then begun.  Indeed this story is a good illustration of why honest inter-disciplinary efforts can be very productive that bring different perspectives and thus connect otherwise isolated frames of mind.

In subsequent decades, Kahneman and other researchers have brought further insights from psychology and injected more reality into economics theory.  Behavioral economics is now a significant scientific discipline that offered more satisfactory explanations and predictions of human economic behaviors.  

One example Kahneman used in his book to illustrate the inadequacy of classical models is fairly easy to follow.  If utility of wealth is indeed the deciding factor as the classical theory postulated, then the following two games would produce similar preferences.  But intuitively, you know it cannot possibly be the case.  

1.      In addition to whatever you own, you have been given $1,000.  You are now asked to choose one of these options: 50% chance to win $1,000 OR get $500 for sure.

2.      In addition to whatever you own, you have been given $2,000.  You are now asked to choose one of these options: 50% chance to lose $1,000 OR lose $500 for sure.

With a 20/20 hindsight, you may wonder why did it take so long for experts to amend flawed models and why so many experts were oblivious to the obviously (to common men) erroneous implications when applying some methods of classical decision theory to scenarios involving losses and risks.

Economics is certainly not the only field that suffers from the ill effects of silo thinking. Researchers in all fields are often so absorbed and entrenched in their research and are so comfortable with their training, they accept the theory and rarely bother to revisit the critical assumptions.  Another distinct possibility is that some theories were never really applied in practice nor produced any serious consequences; thus there is no incentive to validate it.  Worse yet, it is far easier to make incremental enhancements to accepted theory than to establish something fundamentally new.  

In fact silo thinking is a systematic problem that does not end at scientific explorations. It is prevalent in organization and business of all kinds as well.  A vast majority of us devote most of our energy in digging inch by inch the very silo we live in that provides us a comfortable “shelter”, the same reason why most researchers don’t branch out from their familiar ground.  

Whenever one goes out of his or her own silo once in a while, good things happen.  At a minimum, it could be refreshing to see different perspectives.  Sometimes, one may even enjoy an Eureka moment like ancient Greek scholar Archimedes did or a sudden enlightenment like Zen Buddhism calls it.  As trained psychologists, Kahenman and Tversky recognized the importance of the psychological value of gains and losses in decision making that was missed by main stream economists.  Their introduction of the concept of loss aversion has since been considered the most significant contributions of psychology to behavioral economics.  Sounds pretty intuitive and easy, isn’t it?  You can make a difference too if you think out of box once in a while!

Talk to you soon!  Sign off by this frog at this well on this day.

Bully and Beef

In my last blog, I touched upon the Second Opium War of China vs. British Empire in late 19^th century.  Interestingly, one hot button issue in recent weeks from Taiwan is the Second Beef War – popular protest of Taiwan government’s attempt in lifting the ban of importing beefs that contains (any) residue of ractopamine 瘦肉精.   When asked in his interview earlier today with local media in Taiwan, “America doesn’t bully,” said William Stanton, Director of the AIT (American Institute in Taiwan, the official representative of U.S. government in Taiwan).   You might think the most powerful nation of the world wouldn’t need to bully a small country like Taiwan, or would it?

Hearing and reading news like that, one can’t help but to conjure up this image of an bull running into a china shop, knocking down and breaking any objects around it.  According to the Online Etymology Dictionary however, the origin of the word bully had nothing to do with bulls.  It came from 16^th century Dutch and German and until late 19^th century, it was used with a positive meaning of "sweetheart" "lover, brother".  But Taiwan people are not likely to consider recent statements and actions by Mr. Stanton and other American officials/politicians an expression of brotherly love.

According to the Wikipedia entry, “Ractopamine is a drug that is used as a feed additive to promote leanness in pigs raised for their meat.”  It is the active ingredient in products known as Paylean for pigs and Optaflexx for cattle which were approved by FDA for finishing feeds before slaughter in 1999 and 2003 respectively (and for turkey in 2009).  The drug is now used in about 45% of the U.S. pigs and 30% of cattle.   The problem is that with the current industrial meat production process and regulations in U.S., there is no way for consumers to identify which is which. The obvious motivation behind the push is an economic one:   additional drug sales for Elanco Animal Health, a division of Eli Lilly and Company, additional revenue and profits for pig and cattle farmers/companies from (a few percent more) efficiency and resulting additional lean meat.  And when the domestic market is covered, why not reach out to international markets to sale the products?   

The first Beef War started in Oct 2009 when President Ma’s government reached an agreement with U.S. of a protocol under which Taiwan would import “risky” beef and beef offal (with higher risks of being infected by mad cow disease) from U.S.  In the end, Ma’s Nationalist government could not get the protocol ratified inspite of its supermajority in the Legislative Branch.  The Food Safety Act of Taiwan was amended to allow  more varieties of beef be imported but continue to ban virtually the risky beef and beef offal.  Since then, it is widely believed that Washington has been stalling and holding hostage the Trade and Investment Framework Agreement (TIFA) negotiation with Taiwan.  It is an open secret that Taiwan government wants TIFA badly to prevent itself from falling further into China’s grip economically and from falling behind in its competition with ASEAN countries.   Note since the first Beef War, U.S. beef export to Taiwan has increased significantly - from 27 thousand metric tons in 2009 to about 39 thousand metric tons in 2010.  It went down to 35.4 thousand metric tons in 2011 because of the strict regulation and zero tolerance inspection of imported beef for ractopamine, so complained by U.S. representatives.

Of course, no one would be making a big fuss if there weren’t financial and political interests involved.  $200 million dollars (that is the total value of the 2011 export of beef to Taiwan) may sound small, considering the total U.S. export to Taiwan in 2011 was 26 billion dollars.  Nevertheless, a dollar is a dollar and in U.S., there are particular business and farmers who stand to gain from increased export.  There are powerful lobbyists and politicians who represent these constituents and have allies who scratch each other's back.  On Taiwan side, there are pig farmers who worry about the “slippery slope” with pork next on the wish list, the politicians who seize on the popular sentiment and nationalism, and those of the opposition parties who wouldn’t miss the opportunity to attack the ruling party.

Shall we then ask the experts and trust the science like President Ma and Mr. Stanton of AIT suggested?  There are several arguments offered by both that would lead to the obvious conclusion that it is safe to import U.S. beef with limited residue of ractopamine.  Unfortunately some of these arguments such as “FDA approved”, “it is safe for Americans to consume“ only deepened the suspicion and resentment of the American Exceptionalism.  

Arguments have also been made to “bring it back to science” and “trust the experts” which are less than convincing in this case since experts do not have consensus on the risks of consumption of ractopamine fed pigs and beef.  Although limited studies and absence of serious health threat reports appear to support the claim that meat with small residue of ractopamine is safe for human, science cannot be expected to prove it is risk free.  That brings us to the real and fundamental problem – psychologists have recognized for some time that human are not very good in dealing with very small risks; we either ignore them completely or give them too much weight than any data would support.  

In his recent book Thinking, Fast and Slow, Daniel Kahneman, 2002 Nobel Laureate in Economics, devoted a whole section on the conflicting values of the Public and the Experts when it comes down to the judgment of risks like the case with the ractopamine.  Professor Kahneman sketched the opposing views of two of his esteemed colleagues:  Psychologist Paul Slovic does not believe in the existence of objective risk although risks are real.  At the other end of the spectrum, Harvard Law Professor Cass Sunstein believes it is possible to isolate decision makers from public pressure and to trust impartial experts who would not be swayed by irrational and emotional responses of public.  

Professor Kahneman agreed wisely with both.  He had this to say: “Rational or not, fear is painful and debilitating, and policy makers must endeavor to protect the public from fear, not only from real dangers.”  He went on to say “Psychology should inform the design of risk policies that combine the experts’ knowledge with the public’s emotions and intuitions.”  President Ma must be kicking himself for not handling this delicate issue better at the beginning.  It remains to be seen if his government can dig itself out of the hole it is in.  One thing is clear though: science alone cannot solve political problems.

Talk to you soon!

The Kodak Moment

You may or may not know that the phrase “Kodak moment” appeared first in 1961 in Eastman Kodak Company’s ad, right before the introduction of its immensely successful Instamatic camera in 1963.  More than 50 million units of that camera were sold as the first inexpensive, easy-to-load snapshot camera in the world that evolved into the familiar point-and-shoot cameras of today.  

You may or may not know that the tag line “Kodak moment” was reintroduced and trademarked by Kodak in early 1990's, coincided with the launch of the professional digital camera of the world.  Its research engineer Steven Sasson Suck in fact invented and built the first prototype digital camera in the lab back in 1975.  It took more than a dozen years of research of several key technologies to become available before a practical camera could be brought to the market.

With a track record like these and a household name which is synonymous with modern photography, you may wonder why it went bankrupt on Jan 19^th, 132 years after the company was founded by George Eastman who was a passionate pioneer of camera and photography for the masses.  The latest news was that Kodak is exiting the digital cameras and pocket video camera market as expected.

The news reports have been on print and electronic media along with many commentaries and expositions.  For example, in his Jan 5^th The Atlantic article What Killed Kodak?, Jordan Weissman ended his discussion with the comment “Often great at innovation, but always bad at business.”  Doesn’t it sound familiar to you? How many times have you heard comments like this before from writers, reporters and so-called expert with a 20/20 hindsight when a technology company went bust? Is it really true?  If it was, how do you explain their earlier successes?  The pundits and experts want you to believe that they know the reasons, or do they?  How many times have you heard of the following tautology being repeated: “they missed the opportunity because they did not move fast enough with the new technology.”?

Now 105 years old Xerox (also based in Rochester, NY) was at the similar spot before and was criticized in a similar way; it was near bankruptcy only a little over a decade ago.  Zerox made the first photocopying machine and invented laser printing.  Its name was synonymous with copy machine till Japanese competitors took a majority of market share away in late 70s after Zerox settled the antitrust suit and agreed to license its patent portfolio to anyone.  Of course Zerox was preparing for the worst and tried to diversify.  Armed with its famed Xerox PARC portfolios including Ethernet, graphic user interface, and WYSIWYG text editor, Zerox was a pioneer of PC and Workstation in 70s and early 80s.  However it was not commercially successful in these ventures and only saw the inspired Steve Jobs took theirs and some other ideas to the market with Apple Lisa and Apple Macintosh that captured market’s imaginations.

Zerox is doing well now.  It has managed to reverse its decline and become profitable again for some time.  It managed to refocus itself.  It managed to find profitable recipes in document management market utilizing its core strength and brand name, incorporating new digital and software technologies.  Could it have been going down the drain instead?  Sure.  Is it guaranteed to do well in the future?  Of course not! 

All successful large technology companies come from small seeds.   To break into the market successfully requires good talents, ideas, execution, and luck.  The growth and sustaining of initial success present no less challenges.   Passion may be enough to fan the fire to bring one single product to the market as there is nothing to lose and nothing else to go back to.   As one approaches the local and temporal max of the initial explosive trajectory, what next?  Grow or die?

Now defunct Wang Lab, after its initial successes in product ventures including calculators, created the first microprocessor-based word processing system in early 70s.  The systems became very popular with its productivity gain brought to business offices.  It literally displaced office typewriters only to see itself being squeezed out of the market with the arrival of PC a decade later.  Wang Lab did see the opportunity and threat of the new computer technology early.  It did design, make and sale PC, mini-computers and “midframe” computers and was, at its peak, not shy of declaring its ambition to challenge IBM.  Wang Lab filed for bankruptcy in 1992 and fizzled away.  

What about other successful computer companies of that era?  How many young engineers today have ever heard of DEC and Amdahl? The most talked about Apple almost crashed in mid 90s before Steve Jobs returned and reinvented itself.  What about IBM? It was bleeding badly in early 90s and was on the brink of disintegrating into pieces.  For 2011, the Big Blue recorded revenue of over $100 Billion dollars with a net profit of over $15 Billion dollars.  It is one of the most profitable and largest corporations in the world by many measures.  Yet its main money making business are in service and software, something that no one could have imagined or foreseen only 20 years ago.  

The point being for corporations, especially the technology companies, one lives and dies by technology.  As the world and technology change and feed each other constantly, opportunities and ideas come and go.  A fraction of countless entrepreneurs made it.  A fewer was able to sustain the growth of the initial success and survived to adulthood.  Even fewer was able to grow and stay as a giant.

After exhausting the nuances and market share begin to level off, what next?  Where is and how to get the next breakthrough ideas and money making products or services?  What is the chance that the next big idea would come organically, that is, from your R&D team, out of the gazillion comparable talents in the market?   What is the odd that next several winning ideas are coming from your shop instead of the independent entrepreneurs pursuing their personal dreams?  Yet, it takes money to make money.  What are your choices?  So you diversify, transform, and you adapt.  You acquire and invest on market talents and other companies.  You form alliances, influence and bias standards to get any edge you can.  You fend off your competitors and crush small new threats to maximize any (legal) way you can since you know it is ultimately a zero sum game.   You hire professional managers. You streamline your processes, organize your supply chains and build efficient ecosystem, hoping to best manage the complexity and reduce your cost.   You shut down unprofitable and low margin business and let people go to squeeze out more profit margin.  You wine and dine with your executive clients not to grab their hearts but their pockets.   Your romantic passion is taking the back seat as business priority takes over.

All in all, what we have been seeing is simply the Darwinism played out in real-time in front of our eyes. Once in a while, a meteoroid hits.  A disruptive technology comes from nowhere and changes the whole world as you knew it.  No, it wasn’t what your customers told you what they want.  It is the brainchild of someone working in a garage somewhere who dared to dream.  And once in a long while, a totally new business model sneaked up like what Google brought that sucked out the oxygen from the air and turned free Internet-based services into a money making data vault without users’ awareness.

Yes, there will always be more “Kodak Moments”.  Yes, history will repeat itself because each time, the circumstances and factors will always be different.  Instead of mourning and second guessing, let us celebrate the successes by those who dare to try.  Let us pay tributes to those forgotten ones who fell and did not make it to the top. 

Talk to you soon! 

Universal Service

USPS (United State Postal Service) is in (financial) trouble, again! 

Every time, when news broke about the financial woes and possibility of USPS going under, there are plenty of analyses, suggestions, and blames from average citizens, academia, to politicians and pundits, many of whom, for reasons ranging from ignorance to having ulterior motives, look for simple causes and quick fixes to a structural policy problem.

There have been no shortages of data, figures, analysis, and proposals in this continuing saga.  For example, in his June 15, 2011 article, Devin Leonard of Bloomberg Businessweek reported “…43 percent of FedEx’s budget and 61 percent of United Parcel Service’s pay go to employee-related expenses.”  One can point to such a figure and blame the problem on the Postal Union as many had.  One can also point to the data as another example of inefficient and evil big government (yes, USPS is an independent government agency) as many had. Some had also suggested privatization as a solution to monetize its “hidden” assets and values including real estate as if the real problem would go away once the book is cooked right to reflect the “true values” of its asset.

It may not be obvious to everyone but there are many parallels between postal service and telecommunication service since they do share some fundamental characteristics.  While postal service is about transporting physical objects such as letters and parcels from one individual’s hand to another at a distance, telecommunication services is about moving a (stream of) signal such as voice, data, video from one individual’s mouth and devices to another’s.  Further, introductory data communications textbooks would tell you that today’s telecommunication networks including Internet are dominated by the packet-switched technology whereby data packets containing coded user signals with addresses just like letters are routed through switches in the network very much like postal distribution centers . 

For quite some time, the ever increasing use of electronic media transported through Internet has put huge dents on the demands for the physical transport provided by USPS.  First class mail which is the top revenue generator of the USPS has already experienced a decrease in volume of nearly 20% from 98 billion pieces in 2006 to 78 billion pieces in 2010.  Boston Consulting Group has projected the volume will decrease further to 50 billion pieces by 2020.  Meanwhile the postage of first class mail has increased 6 times since 2001 from 34 cents to 44 cents today.  The problem cries for new service ideas to generate demands and revenues which unfortunately don’t seem to be getting enough attention as cost cutting and fear of laying offs dominate the headlines.

Postal system is one of the oldest means of communication of people.  When the parent commanded their kid running down the street to deliver a note or verbal message to a neighbor down the street, a mail had been sent.  There is no fundamental difference in function between such an ad-hoc service and early postal system of empires across the world for more than thousands of years.

Recognizing the critically important role of communications of its citizens, governments across the world have set up postal services early.  For U.S., the Postal Clause - to establish post offices and post roads - in Article One of the United States Constitution, is one of the 18 only explicitly enumerated powers of Congress that includes “to declare war” and “to borrow money”.  Indeed postal service was viewed to be essential in aiding the cohesiveness and holding the states together for the union. Founding father Benjamin Franklin was appointed the first postmaster general in 1775.

The most important advance of modern postal service is the introduction of the concept of Universal Service by Rowland Hill in U.K. in the 1837 reform of the Uniform Penny Post.  It was quickly adopted by other countries including U.S. and has been the standard of the postal service ever since.  The critical tenants of Universal Service as the word universal suggests: availability and affordability to all.  The obvious example is the first class mail service which is delivered at a flat fee of 44 cents regardless who you are and where you live (including the most remote areas of Hawaii and Alaska!).

In the same vein, the all important Communications Act of 1934 by Congress firmly established the telephone service as a regulated service (by the new agency FCC) and had resulted in the recognition of A&T’s monopoly.  And the Title 1 of the Act defined the notion of universal service as applied to wire and wireless communications “… to make available, so far as possible, to all the people of the United States, without discrimination on the basis of race, color, religion, national origin, or sex, a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges,…”

Fast forward to 1960s, the MCI Communications (Microwave Communications, Inc., now a part of Verizon) began offering long distance communication services to urban business customers and resellers in selected markets using low cost microwave relay networks.  It is price competitive to AT&T’s services and highly profitable due in part to the long distance services of AT&T were required to subsidize the local services to achieve uniform pricing for ALL customers. 

As AT&T (or more commonly referred to as the Ma Bell or Bell System) continued to lose grounds to competing long distance services for highly profitable business customers, pressure mounted to settle the antitrust suits which ended with the 1984 breakup of AT&T.  The 1984 divestiture of Bell System stipulated the Bell System be divided into two parts – a deregulated long distance service plus telecom equipment manufacturing company inclusive of R&D (Bell Labs) held by AT&T and seven independent “Baby Bells” that provide regulated and monopolized local telephone services across United States.  The latter would serve as an unbiased interface between end customers and all long distance service carriers. 

The divestiture marked the beginning of the end of the era, topic of my last blog – An Era Has Passed.  Looking back, it was merely one of the more visible parts of a larger economic-political force – deregulation - that had begun gaining momentum in 1970s and permeated through transportation, energy, communications, and climaxed at the financial deregulation and subsequent global financial crisis of 2007-2009 from which we are still trying to dig ourselves out of the hole.

More similarity between telecom and postal service:  FedEx and UPS have been prominent private courier services with global reach in competing with USPS on the lucrative parcel services, not unlike MCI of the late 60’s in competing with AT&T.   One advantage of these private services they do not need to provide ubiquitous coverage of end customers as they are not subject to the requirement of universal service.  FedEx and UPS in fact have been contracting USPS to deliver their packages to a large number of households, not unlike when a long distance call was connected to end users through local Bell’s or cable service.   

This is just one but nevertheless a critical aspect of the postal service that we have been taking for granted for so long.  What is really under siege is the notion of universal service, something noble that defines our society and nation.  What the crises in USPS (and the twists and turns in telecom industry) asked us again and again was not for another budgetary or accounting gimmick.  They are really asking us “what about the universal service?”  As far as I am concern, abandoning the principle of universal service would amount to a declaration of class war and is a non-starter.  What do we do?

Talk to you soon!

Is the Other Shoe Dropping?

Just when U.S. economy began to stabilize and shows signs of recovery out of the Late-2000s recession, politically and ideologically driven fiscal policy debates heat up again like a wild fire that threatens to set the economy back to a much feared double-dip recession.  After contentious and protracted political battles for months, U.S. Congress passed the complicated Budget Control Act of 2011 on August 2^nd at the last minute to kick the can of “2011 United States debt ceiling crisis” down the road.  Shortly after, as agreed and stipulated by the bill, a congressional “Super Committee” (the formal name is the Joint Select Committee on Deficit Reduction) was created which has until Nov. 23, 2011, the day before the Thanksgiving Day, to recommend (a simple majority suffices) to the full Congress for an additional deficit reduction of $1.5 trillion dollars or more over next ten–years.

This carefully chosen (by four House and Senate leaders of the two political parties) 12-members “dream team” is consisted of: for Democrats, Senators Pat Murray of Washington (committee co-chair), John Kerry of Massachusetts, Max Baucus Montana, and House Representatives Xavier Becerra of California, James Clyburn of South Carolina, and Chris Van Hollen of Maryland; and for Republicans, Senators Jon Kyl of Arizona, Pat Toomey of Pennsylvania, Rob Portman of Ohio, and House Representatives Dave Camp of Texas (committee co-chair), Dave Camp and Fred Upton of Michigan. 

If you take a look of committee members’ credentials and stands, you would agree that this is the first positive response to the call for “balanced approach” by President Obama throughout the crisis (you know I am being sarcastic, don’t you?) The sixty four trillion dollars question is how the next episode of this political reality TV show is going to be played out?

You might ask why the gridlock?  The answer is pretty obvious and a familiar one: the Democrats want no cuts to entitlements and the Republicans want no increase to taxes.  At the same time, the majority of people would agree that the rational and most sensible solution to the long-term debt problem is the opposite: cuts in run-away dominant expenses (in entitlements) and increase of total revenue through taxes.  But if you were to run on such a platform, do you think you will be elected to any public offices?

You might ask how much is too much debt?  Technically, the debt ceiling mentioned above applies to the total federal debt (thus excludes state and local debts) or gross debt that reached about $13.6 trillion or a little over 90% of GDP at the end of Sept 2010. By this latter measure of debt-to-GDP ratio, Japan, the third largest economy in the world (by GDP), has the dubious honor of being the highest which had reached 225%.  Singapore, one of the most well-off nations in the world (by GDP per capita) has a debt-to-GDP ratio of about 100%.  All these only suggest the difficulties with the single index approach. Note the gross debt consists of two components: public debt – debts held by investors other than federal government (e.g., treasury bonds held by Chinese government), and intra-governmental debt held by e.g. Social Security and Medicare Trust Funds (operated by federal government).  To add more to the confusion, there are also debates among the economists if and how the intra-government debts should be accounted for.  At the end of Sept 2010, the latter part was over $4 trillion, more than 30% of the total debt. 

Let us accept for the moment the notion that the total debt is too high, you might ask then the most important question what should we do and what should we tell the government do?  The truth is no one is really sure but that never stopped many from offering opinions as if they do know for sure. 

In reality, the government has two powerful tools – monetary and fiscal policies. The former belongs to the independent Federal Reserve which has pretty much used up its ammunitions with its continuing “zero interest rate” policy and Quantitative Easing in response to the recession started by the 2007 financial crisis.  The latter is under the control of executive and legislative branches – the congress and the president.   It is necessarily political and is where all the confusions and actions have been.

The essence of the current debt debate is simply the question of austerity or stimulus.    Unfortunately, economists (Nobel laureates included) do not have a solid grasp of the problems and solutions nor consensus.  It gives politicians and media a huge platform to play their agenda as we are all participating, like to or not, in this giant new social economic experiment.

So far, the best available diagnosis of the problem we have been facing appears to be the Balance Sheet Recession.  It is a notion developed by Richard Koo years ago from the experience with the Great Recession (aka the Lost Decades) of Japan starting in 1990. Richard is an American educated economist and now the Chief Economist of Nomura Research Institute in Tokyo.  He has suggested that what U.S. and Europe have been going through is a replay of what Japan has which is not the familiar traditional recessions of the past decades. The symptom and underlying dynamics is vastly different in that the private sector is not spending because the overriding priority for them is to pay down the debts on balance sheets (that is, income minus liability) that arose from the burst of their asset bubbles.Below is Richard Koo’s April 9, 2011 presentation at a Panel in INET's Bretton Woods Conference.

Richard Koo’s recommended treatment is clear for the balance sheet recession when private sector is not spending and waiting for demand.  He argued convincingly with Japan as an example that government, as the only remaining player, must provide stimulus to keep the economy going.  He also argued that austerity is the wrong medicine which could result in a spiraling down of economy.  Unfortunately, that is exactly where the wave is heading and against which we are swimming.  I am for having disciplines in fiscal policy. But it is not a question of big or small government; it is a question of smart or stupid government!

In the 1957 movie classic 12 Angry Men, justice were served because one cool headed juror #8 (played by Henry Fonda) prevailed.  Will the 12 member Super Committee produce something good?  In real life, with the two-party construct in our political system, there is a strong tendency for adversarial framing in conflicts by the opposing parties, not unlike what happens in our justice system.  As a result, it is very difficult for resolution of this protracted political conflict to even pass the antagonism. Grounded and rigorous reasoning gets drawn out by 30 seconds sound bites and videos which is not the way to help solving a complex problem.

Despite the built-in trigger, the Budget Control Act of 2011 contains no credible threat of mutual destruction.  I am thus not optimistic that the Super Committee and the congress can come to any meaningful and productive resolution; a “hung jury” would be the more likely outcome.  After all, these are merely elected politicians who are supposed to represent us, the 300 millions imperfect, confused, frustrated, and sometimes angry ordinary people.  Should we be surprised about how we get ourselves into this situation?  A situation which Chinese describes as 盲人騎瞎馬 (南朝宋．劉義慶《世說新語．排調》) - the blind rides a blind horse (a similar metaphor in the West would be the blind lead the blind)?  Will we get ourselves out of this mess in time?  What I did not tell you was the second half of the quote “盲人騎瞎馬 - the blind rides a blind horse”.  It is “夜半臨深池 – coming to the edge of a deep pond in a dark night.”  May God bless us all!

Talk to you soon!

All Eyes on Egypt

Hosni Mubarak, the “President for Life” of Egypt, finally yielded and resigned on Feb 11^th, the 18th day after the first mass protest that called for his ousting at Tahrir (Liberation) square in Cairo on Jan 25^th.  Word like cosmic and historical have been used by the journalists and commentators to describe the event, considering the size and strategic importance of Egypt in Islamic and the Middle East geopolitical plays.   So much coverage by the press has been reported across the world daily for the last 2+ weeks that requires no repetition.  I do however like to highlight a few what I thought were unique aspects of this mostly non-violent revolution and made some observations as Egyptians began to search for and shape their path to the future.

It is the first time in history that Internet based social network services like Facebook and Twitter were used in organizing and mobilizing protesters from bottom up dynamically.  Wael Ghonim, the 30-year-old Egyptian marketing manager of Google Inc. was credited for starting the Facebook page “We Are All Khaled Said” under the assumed name “El Shaheeed,” (meaning the martyr in Arabic) that called for and sparked the first protest on Jan. 25.  It took less than 8 months to gather sufficient energy and momentum: that Facebook page was set up within 5 days of the suspicious death of Khaled Said on June 6^th last year, an 28 years old Egyptian blogger (see Jennifer Preston’s Feb 5th New York Times article) who was beaten to death by two policemen.  With more than half a million people signed up, it is the biggest dissident Facebook page in Egypt.  Egyptian government made Wael Ghonim disappeared on Jan 28^th.  Fortunately he was not physically harmed and was released 12 days later.

With the distributed, decentralized and self-reconfiguring architecture of Internet, with the applications like YouTube and social networks, and with technologies like cell phones and smart phones equipped with camera, dictators no longer have monopoly over information dissemination and “truth”.   State sponsored and orchestrated propaganda through radio, printed press and TV networks is no longer the tool the authoritarian governments can depend on to fool their people.  When Mubarak and his men tried the oldest isolation trick on the protesters by shutting down Internet and mobile services, the assault could not continue as Egyptian’s every day economic activity came to a halt without these ubiquitous infrastructures.  

You may wonder then the social-economy status of Egypt when you saw the scene that some pro-Mubarak people on camels and horses charging against the anti-Mubarak demonstrators with cell phones at one point during the revolution.   With 80 million people, Egypt is the most populous country in Middle East and the second most populous in Africa with almost all of them concentrated in few areas along the banks of Nile and Suez Canal.   For the last several decades, Egypt has had a high population growth rate (2.0+%) and has been adding more than 1.5 million people per year recently to its population.  As a result, about 50% of its population are under age 25.  While the commitment to education is strong (free public education through university) with over half million students enrolled in colleges and universities, Egypt’s 70% literacy rate is much less than desired.  It does have bright spots in recent years for economic development, but the population growth has outpaced its resources (especially water) and economic growth with a per capita GDP at $6,000+, ranked 103^rd in the world (according to IMF).  Over 40% of its people live in the range of extreme poor to near poor.  On top of it, a significant number of high school and college graduates are unemployed (estimated at around 25% for those under 25 years old) or under-employed and there is no hope in sight.  Doesn’t it sound like a prescription for social instability and revolution in waiting? 

As the Egyptian Revolution of 2011 enters the next phase when Mubarak stepped down and handed over the power to the 11 members Supreme Council of the Armed Forces, all eyes are now on the Egyptian military led by the 76 years old Mohamed Hussein Tantawi who has been the head of the Defense Ministry and Defense Production Ministry since 1991.  With nearly half a million active personnel, it is the 10^th largest military force in the world.  The guesstimate for the annual defense budget of Egypt ranges from $7 to $25 billion dollars including a steady $1.3 billion dollars aid from U.S.  The Egyptian military is an independent entity that reports directly to the President.  Throughout the 59 years of the Republic since the Revolution of 1952 by a group of young army officers, Egypt had effectively only three rulers, all from Egyptian military:  Nasser (14 years), Sadat (11 years, assassinated), and Mubarak (1981 – 2011). 

What is more intriguing and less known is the significant role and influence that the Egyptian Military has in Egyptian business world.  The reality is that Egyptian economy has been following the state-dominated model with 70% of the workforce outside of agriculture sector work for the government!  The Egyptian military in fact controls not only security and the defense industry, it is also heavily engaged in civilian businesses including consumer staples, road and housing construction, owns land and involved in resort management, starting with the construction of the Aswan High Dam back in 1960.  According to the Feb 9th Time Magazine article by Ken Stier, Egyptian military business empire may account for 10% to 15% of Egypt's $210 billion economy!  

As the most powerful institution from the rest of the government with a vested interest, the Egyptian military has served as the critically needed stabilizing force in the autocratic government.  It enjoys the popular nationalistic support and has managed to keep the respect of the people by staying behind the scene and positioning itself successfully as nation’s neutral guardian.  When the scenes of the friendly interaction between the protesters and the Army were shown on news media, one can’t help but to contrast it with the image of Tank Man in Beijing during the suppression of the Tiananmen Square Protests of 1989 by the Communist China.  It could have ended in tragedy should the military choose to side with Mubarak.  

Despite all that, it is questionable that if the military can meet the younger Egyptian’s zeal for reform and for more and faster changes.  For one, changing status-quo is hard; the older generals are not likely to be able to deliver satisfactory result in short time, even if they are willing, given the fundamental issues above and their self-interest in maintaining status-quo.  The first test will be the September election.  It remains to be seen how will the Egyptian military address the revision of the Constitution and the transparency of the process.  Only in last Sept, a New York Times article reported that it has put eight striking employees of a military factory on trial in a military court for “disclosing military secrets” and “illegally stopping production.”   Even a bigger challenge and the next test will be if and when a civilian controlled military, a necessary condition for democracy, would take place.

All in all, the Egyptians people should be proud of what they have accomplished in this short 18 days.  They have been an inspiration for many suppressed people in the rest of the world and the peaceful revolution serves as a loud warning to all corrupted and dysfunctional authoritarian regimes.  Hosni Mubarak is not the first one nor will he be the last one who tries so hard to hang onto his/her position and to hold onto their power.   The truth is if you sit back and reflect for a moment, you would find such behavior familiar in public and private sector, and in large and small organization.   “When and how to let it go” is actually a very important but often overlooked question; something for us to ponder. In the mean time, as the Egyptian Revolution of 2011 moves forward, I wish the Egyptian people succeed in managing their future and making a better life.

Talk to you soon!