The Conquest of Happiness

I've been reading The Conquest of Happiness by Bertrand Russell. It is a brilliant book by a brilliant man, combining psychology, history, philosophy, sociology, and other disciplines to diagnose the modern, human condition. Here's an excerpt from page 114:

"The happiness of my gardener is of the same species; he wages a perennial war against rabbits, of which he speaks exactly as Scotland Yard speaks of Bolsheviks; he considers them dark, deigning and ferocious, and is of opinion that they can only be met by means of a cunning equal to their own. Like the heroes of Valhalla who spent every day hunting a certain wild boar, which they killed every evening but which miraculously came to life again in the morning, my gardener can slay his enemy one day without any fear that the enemy will have disappeared the next day. Although well over seventy, he works all day and bicycles sixteen hilly miles to and from his work, but the fount of joy is inexhaustible, and it is "they rabbits" that supply it."

and later..

"What joy can we experience in waging war on such puny creatures as rabbits? The argument, to my mind, is a poor one. A rabbit is very much larger than a yellow fever bacillus, and yet a superior person can find happiness in making war upon the latter. Pleasures exactly similar to those of my gardener so far as their emotional content is concerned are open to the most highly educated people."

Russell's inherent hedonism does keep me from subscribing wholesale to his ideas, but he is, nonetheless, insightful and instructive.

The Politicization of the Nobel Peace Prize

The award of the Nobel peace prize strikes one as absurd and baffling. What has Obama done to deserve the prize? His own statement was that the reward "[must be] less a recognition of his accomplishments than a 'call to action.'"

I agree with John Bolton (former ambassador to the UN), who said, "It is indicative of the politicization of the Nobel Peace Prize process. This just carries it to the n-th degree." In fact, the Nobel Peace Prize process has been somewhat ridiculous for some time and continues to be.

To analyze this further, I must first ask, "For what is this prize awarded?" Is it a prize for pacifism? Is that good? Should Neville Chamberlain have won the Nobel prize for his refusal to confront Nazi Germany? Is it a prize for taking steps to reduce violence? This is the only context in which the award, in 1994, to Yassir Arafat makes any sense. If one believed, at that time, that he had renounced terrorism (which seems not to have been true), then it might make sense to reward/award him for having renounced violent tactics. The problem with this definition, though, is that one must support violence in the first place/

The sad truth is that the committee's goals are far more simplistic, naive, and political. The committee says that "His diplomacy is founded on the concept that those who are to lead the world must do so on the basis of values and attitudes that are shared by the majority of the world's population." What? What the hell does that mean? That the Nobel Peace Prize is awarded to those who further a democratic world government?

When people were being slaughtered in Rwanda, in the 1990's, the majority of the world preferred not to intervene. If President Clinton HAD intervened, and had saved hundreds of thousands or millions of lives, would he thereby have become ineligible for the Nobel Peace Prize?

The Nobel Committee's goals are so obviously politically motivated, its understanding of international politics, conflict, and war so obviously weak, and its own criteria for designating winners of the prize so poorly thought out, the prize should cease to exist. The money would be better spent increasing the size of the prize for the other Nobel awards.

Big changes in GDP masked by small change in GDP

I had to do some analysis on the US GDP for a class, anyway, but it's pretty interesting, so I thought I'd post it here.

This chart is titled "Table 1.1.2. Contributions to Percent Change in Real Gross Domestic Product" from the Bureau of Economic Analysis website, last revised 5/29/09.

Looking at the contributions to GDP is very important.

Several factors jump out:

1) There is a roughly 1% swing Q4’08 to Q1’09 in Government spending and investment. This is a major contributor to the low GDP in Q1’09. Had government spending made the same contribution as in Q4’08, the Q1’09 GDP would have declined at an annual rate of roughly only 4.7%.

2) The largest and most interesting factor of all is the shift in gross private domestic investment. The contribution of gross private domestic investment to GDP declined by almost 5% (annualized rate) between Q4’08 and Q1’09. Within this number, two subcomponents are particularly significant: nonresidential investment and inventories. Both contributed significantly to the decline in Q1’09.

3) Consumer spending increased significantly. Whereas consumer spending contributed nearly –3% in Q4’08, in Q1’09 it actually contributed positively to the GDP. The change from one quarter to the other was near 4% (annual rate contribution).

4) Net Exports rose. Whereas net exports were roughly equal to net imports in Q4’08, in Q1’09, exports made a significant positive contribution to GDP.

Based on these factors, I see significant improvement. Falling inventories are one-time adjustments – in the long run, inventory must be repurchased. The fact that real GDP growth accelerated while inventories fell means that the economy’s fundamental health increased by more than the 0.6% difference between Q4’08 and Q1’09. The obvious source of weakness and reason for concern is residential and non-residential investment. To indicate a sustainable recovery, I would look for those areas to improve significantly, while ideally retaining a positive or near-zero contribution of net exports to GDP and for government spending to stay with the +/- 1% band in terms of contribution. The key with government spending is that somehow the federal stimulus roughly offset the massive decline in state and local spending.

I would also look carefully for the non-government savings rate to flatten out. All this money that isn’t being invested in the “gross private domestic investment” as well as earned from exports has to go somewhere. If the savings rate flattens out, then the GDP will not be dragged down by continued unwillingness to spend or invest.

Retroactive Name Justification is the new Name Recursivity

Remember acronym recursivity?

An example of acronym recursivity is the name of Wine. Wine stands for "WINE is Not an Emulator". WINE is, of course, a form of emulator (or is it?) to run Windows programs on Linux.
Jason and I created such a thing, once. We made a website called JASON. After naming it, we decided it stood for Jason and Andy's Super Oliphaunt Nubian.

In 2009, acronym recursivity is passe. I propose a new awesome kind of naming: Retroactive Name Justification or "RNJ". Recursively, it could be "RNJ is Name Justification."

bgiga is my newest startup venture. It's actually named bgiga because I happened to already own that domain name.

However, since then, I've come up with several reasons "why" our business (which is about job seeking/candidate discovery) is called bgiga:
1) bgiga is short for "better gigs for all."
2) bgiga means "billions of jobs."
3) bgiga makes for cool slogans like, "bgiga: go big" and "bgiga: get big."

There is a more scientific purpose behind retroactive name justification as well. Lately, I've heard a lot of bad names for startups. Many of them survive, but they are nonetheless suboptimal. The reason they are suboptimal is that they are hard to spell, are confusing, or have alternate readings. For example: http://www.expertsexchange.com/ or http://www.gottgame.com/). For http://www.flickr.com/, it has been documented that they lose as many as 150K hits in a single month to "flicker.com." There are tons of other examples. Even Google is only a decent name by accident. L&S meant to name it "googol" but they didn't know how to spell "googol." Lucky for them, everyone else tends to misspell it in the same way. So, being able to choose a good, easy to spell, easy to remember name FIRST, and then decide what it means (if you're clever enough to do so), has certain merits.

RNJ is the new acronym recursivity.

What's in a Name?

Names are just the common nouns of yesteryear, adorned and obscured by the stained looking glass of history.

GDP and the recession

I have made a graph that shows "recessionary" periods (according to Andy's new definition he just made up) in grey boxes during the post-war period, on a graph of "% Change in GDP from previous quarter, seasonally adjusted, annualized rate" based on data from The Bureau of Economic Analysis, via Economagic.com.

Note that recessions have become less frequent in the last 20 years, less severe, and have been of "average" length. Also note that GDP growth has generally been far more stable. The average % change in GDP for this data is 3.244%.

The Stimulus Plan

I have reserved judgment for a long time about the stimulus plan, and now I am finally ready to comment on it.

Fundamentals:
There are a few important things to point out about stimulus plans in general...

1. Stimulus measures must happen fast to work.
2. Stimulus money must be put into places where it will be consumed or invested. Where it will be consumed or invested depends on the marginal propensity to save (if it's saved, it isn't consumed or invested). Let's say that you and all your friends make up an economy. I give you $100. Let's say that you typically spend 95% of what you get (you save 5%). So, you buy $95 worth of goods and services from your friends. Then, they have the $95. Each of them saves 5% of that, and spends 95%, etc... So, whether that "savings" percentage is 1% or 10% makes a big deal after you've kind of multiplied out all the economic activity.
3. Whether the stimulus should target boosting consumption or boosting investment is not obvious. Both things can be good, and no one can tell you what the "optimal" ratio is. The optimal ratio probably changes over time, anyway. The US is currently "consuming" more of its GDP than it has historically, on average, so a case can be made that stimulating "investment" right now is better than stimulating "consumption."

Bad things about the stimulus plan:

1. The US economy has had a very, very low (or negative) savings rate and too much borrowing. Only just recently (since the economy broke down), have Americans started saving. Too many things in the stimulus plan are simply designed to jump start borrowing and spending of the exact same types we had too much of before.
2. The stimulus plan doesn't give employers enough incentives to raise employment. The stimulus plan should lower the payroll taxes, because this helps employers hire more workers and/or means people take home more of their paychecks, and it also helps small businesses and self-employed people immensely.
3. The stimulus plan doesn't do enough to help states. The states spend 2x as much money as the federal government does. They (the states) have no money. In order to raise money, states raise property, car, excise, and sales taxes, for example. These kinds of taxes directly and negatively affect the exact kind of spending the federal government is trying to stimulate (such as buying cars). Instead of simply having state and federal taxes offset one another, the federal government should cut out the middleman by making up state tax shortfalls, so they don't have to do things like raise sales taxes.
4. Much of the stimulus money will be too slow. The building of schools, bridges, etc... will happen too slowly to stimulate the economy. The economy will likely be out of the recession in a year or two, but most of the money spent on a new bridge will trickle into the economy slowly over a 5 year period or so.
5. The stimulus does nothing to address certain causes of structural unemployment and weakness in the economy, such as screwed up tax incentives, over-investment in houses (it actually further encourages this), illogical industry subsidies, broken labor union contracts, etc...
6. The stimulus plan doesn't adequately encourage "creative destruction." Rather than propping up ailing industries, we should be easing the bankruptcy process, encouraging business formation, and incentivizing business investment.

Good things about the stimulus plan:

1. If you're going to "waste" money in a stimulus plan by having it come too slowly, at least "waste" it on things that have long term value, like infrastructure construction. That's better than simply spending it on transfer payments. If you're going to do transfer payments as stimulus (transfer money from people with high savings rates to people with low savings rates) do it fast so it can stimulate the economy now.
2. The stimulus plan does increase unemployment benefits, and gets us a step closer to a working national wage insurance scheme.

M&A Failure Rates

There are a lot of statistics out there about how often mergers (and/or acquisitions) "fail." Failure is typically defined as something like "not meeting financial goals" or "not increasing shareholder value." I've seen failure rates everywhere from about 55%-70%. This would mean that, basically, 2 out of every 3 mergers "fails."

The conventional wisdom *used* to be that they failed because of financial, legal or other reasons. Basically, there were agency issues and complexities that weren't teased out in the due diligence process, and those things caused the endeavor to fail.

In the last few years, the conventional wisdom has changed. The new convention is that mergers fail due to a lack of cultural compatibility or a failure to adapt the cultures to mesh together. Yet, the story goes, they happen anyway because of the egos of executives and because of the interminable pressure to grow. I'm sure that these reason *do* explain many M&A failures, but...

I would like to interject. Specifically, I would like to point out that there are two major flaws with the simple statement: "Most M&A activities fail."

1) Most startups fail, but that doesn't mean startups are a bad idea or are fundamentally done incorrectly. Maybe only 1 in 30 startups really makes it, but when they do make it, if they return 40X their investment, the system, as a whole, works. In fact, it works BETTER than NOT having 30 startups, lumping all that activitiy together into a single larger company, and hoping that *it* works (this is basically how Japan's economy works). The startup system allows for more flexibility, creativity, and specialization of labor.

So, if 2/3 of mergers fail, but if those that succeed garner huge profits, it might be perfectly logical that they continue to occur. Let's say Coke and Pepsi merged (which would never be allowed, but pretend it were). Maybe, if they merged, the simple economies of scale in production and distribution would allow them to eke out a 5% cost savings. Maybe this would pay for the merger efforts, or maybe it wouldn't. However, what if the reduced competition ALSO allowed them to raise prices by 20%? Then, the boon to the shareholders might be immense. Because of the enormous upside, companies might risk doing something that fails more often than it succeeds.

2) There is another systematic, failure-inducing tendency. M&A activity success is often measured by increases in returns to shareholders. But, this is wrong for 2 reasons.

The first is that comparing to the past is not necessarily relevant. What matters is how the merged entity's stock does compared to how the separate companies' stocks would have done over the same time period. Of course, we can't know this, but perhaps companies decide to merge when their industries are contracting (to achieve economies of scale) or when growth is slowing (in fact, I think this is true). If this is the case, you would see a systematic biasing of the results when comparing to rates of return before the merger activity takes place, when the entire industry/market was different. Of course, there's also the possibility that the company is acquired for "non-financial," strategic reasons, but I think mostly this is not relevant. Ultimately, all the strategic factors should affect the returns of the company's stock eventually. Again, the question is more fundamental: "What would have happened if we didn't do the merger?" NOT "How did we do after the merger compared to before?"

Second, since so many acquisitions (or mergers) are paid for with stock, another related possibility is that companies tend to pursue mergers when they know their stock is overvalued. There is no "insider trading" rule against making acquisitions when you know your stock is "high." When AOL merged with Time Warner, it *knew* its stock price was probably unjustified. So, if companies tend to buy when their stock is high, of course they are going to tend to underperform, stock return-wise, after the merger. A counter-argument to this is that the acquiree might be more likely to sell when their stock is undervalued, and that should offset this fact, but I suspect that's not true because: a) the acquiree makes up less of the total, anyway, so it wouldn't fullly offset, and b) the acquirer has "insider" knowledge of its own stock, but not of the target's, and it (the acquirer) makes the decisions (sometimes the acquiree doesn't even want to be acquired at all).

A little more research and regression analysis could probably separate out some of these factors. I hope someone, somewhere, in some grad school (other than Stanford, because poor old Jim Collins suffers from the correlation=causation disease BIG TIME), who has taken statistics (see previous note on how Stanford sucks), will do this research.

Kyoto Protocol

The Kyoto Protocol is and has been a deeply flawed, unfair system. Here is one example of how China is scamming the UN carbon credit program:

http://news.yahoo.com/s/ap/20090125/ap_on_re_as/china_s_golden_dams_3