Accountability is everything

Free markets only work when there are incentives and feedback mechanisms to encourage people to do the right thing. While America isn’t the freest economy in the world, it’s in the 95th percentile, which (with its commitment to democracy and free speech) has been the key to its economic success.

There were two tidbits this morning in the WSJ, one encouraging, one not.

The encouraging one was the decision of the Olin Foundation to go out of business. The creation of permanent, self-perpetuation nonprofit foundations is among the most foolish vanities of their (vain and often foolish) millionaire donors, for exactly the reason that Peter Flanigan has said:

Perpetual foundations are quite silly. They exist for the benefit of trustees and staff rather than for the goals set forth by the original donor.

Fortunately, donor John Olin created a foundation that did go out of business, a model other donors (Bill Gates?) should emulate.

The less encouraging note was a series of letters responding to a column by Ethan Penner earlier this month that identified the huge moral hazard created by the Federal Reserve’s “too big to fail” policy. Letter writer Thomas Shively was even more emphatic:

Those who fault the Fed … primarily focus on the exceptionally loose monetary policy …. [This was] only one example of the so-called Greenspan 'put,' now the Bernanke put -- the embodiment of the Fed's long-standing policy of always running to the rescue, while letting the good times roll, which has fostered the culture of moral hazard.

There is tremendous irony, and common sense, in the realization that multiple successful rescues of the financial system by the Fed over several decades will eventually create a risk-taking culture that even the Fed will no longer be able to single-handedly save, at least not without serious inflationary consequences or help from foreigners to avoid a dollar collapse.

Giving away a “put” to investors, large and small, assures that put will be exercised and that Uncle Sam spends ever-more money bailing out less prudent or more reckless members of society. It’s almost enough to make one wish Ron Paul had achieved electoral success, since on this one issue he’s 100% right.

Ironically, I found this on the day that the WSJ reported that its new owner no longer is content to have the country’s most important business publication. Instead, Rupert Murdoch will be de-emphasizing business coverage (and longer stories in general) to offer a center-right competitor to the center-left NY Times. I don’t know if this means we’ll have less intelligent coverage of economic issues in the WSJ, or just less coverage, but it’s a big opportunity for Business Week, Fortune and Forbes (and perhaps the FT as well).

Rambus wins -- who loses?

The Court of Appeals overturned the Federal Trade Commission antitrust sanctions against Rambus, which in turn overturned an earlier FTC administrative law judge who ruled in favor of Rambus. The whole issue was whether Rambus was honest about its patents in a timely fashion while JEDEC was making a RDRAM standard.

The case of Rambus and its IP strategies are among the most controversial issue in IP and standards. I would say “among” only because as with certain other topics, only one side of the story tends to get reported and many would just as soon see the company lynched. Rambus did win one trial alleging patent infringement by big vendors, who never really wanted to pay royalties.

Even for those (few) who sympathize with Rambus, the ruling has the unfortunate effect of introducing turmoil into many aspects of IP and standardization. The Rambus decision was previously a bright line that SDO managers (and participants) could count on. Now, we need to see whether Rambus’ escape is merely a process issue (JEDEC left a loophole that meant Rambus couldn’t be punished) or if it sets a more general precedent — theoretical or practical — that makes it impossible for SDOs to prevent gaming of the system.

Perhaps the 1995 case that Dell settled would be the precedent for now. My sense is that absent FTC v. Rambus we will need a new legal decision (or administrative act upheld by a court) to set the boundaries of gaming the system. There have been very few cases on this issue that have gone to trial in the past 15 years, so it might be another 5 years before we get a controlling precedent. That uncertainty would be good for law firm billable hours but bad for everyone else.

Stop your whining

For those who live outside California, the state right now is trying (or failing) to cope with its decennial budget disaster. This time around, the state is looking at a $14.5 billion shortfall in projected revenues. The governor is proposing a 10% across the board cut, including $4.4 billion from funding for local K-12 schools and $1.1 billion from higher education.

This man-made budget disaster is more predictable than the Atlantic hurricane season, let alone California earthquakes. In good times, the politicians spend like drunken sailors — increasing the spending base — and then when the economic cycle inevitably turns down, they wonder why the state is broke.

The end of the dot-com bubble brought the 2003 recall of a governor, who was replaced by the governator; this year’s budget problems are playing out like five years ago. In 1991 — when California had to pay the peace dividend through aerospace layoffs — Republican Pete Wilson faced a then-record $14 billion deficit, raising taxes to pay half and cutting spending for the rest.

This week, teenagers (encouraged by cynical political activists) are running around like this has never happened before, making narcissistic pronouncements about how spending less on them is bad for the whole world. What prompt me to write this post was a radio soundbite, the claim of a semi-articulate student that “It’s going to impact everyone, the lack of prioritization of education in this state.”

They act as though there’s some big pot of money waiting to be spent on them, but there isn’t. The reality of state spending in a cyclical economy is that some years there is less money to spend. Since the politicians never save for a rainy day — they’d rather buy votes with spending increases or tax cuts — the best we can hope for is that they’ll pay down debt when the coffers are full.

That said, the cuts made this year by the state in UC and CSU funding will probably never fully restored. The easy cuts have been made, as when the UC replacing state funding in part by raising professional school (medicine, law, business) fees to market prices. For the CSU, we will likely see another ratchet in the inexorable rise of class size, reducing the individual attention that students receive. Special programs that have outside funding (like honors) will survive, but ones that don’t have such funding (such as our prize-winning simulation program) are likely to disappear unless they can get such funding.

Update 3:30 p.m.: I'm told price increases for CSU business schools (following the UC model) are likely to happen; as with UC, raising fees will presumably reduce state funding of professional schools so the money can be redeployed elsewhere in higher education.

That plan explains this benchmark arguing California fees are too low. It doesn't explain what will happen the next time there's a budget crisis, when the fees have already been raised.

Week in review

This week I’ve been swamped coaching my two simulation teams in the final rounds of their International Collegiate Business Strategy Competition. A long slog that began on Jan. 7 (during winter vacation) ended Saturday with both teams victorious.

However, I wanted to comment quickly on a few items:

• The WSJ had a great article (available free) on how Vizio used offshore manufacturing to come from nowhere to be one of the top TV makers — in a virtual three-way tie (with Sony and Samsung) for the most LCD sales in North America. Consumer electronics has been a brutal commodity business with entrenched competitors and (except for flat panels) excess capacity, so Vizio’s success (using open innovation) should be an inspiration for upstarts everywhere.
• Red Hat has beat a retreat from the desktop Linux business. Which Windows advantage matter most — the one from network effects or switching costs? (The exact question I tried to answer with my dissertation). I don’t know, but If Red Hat can’t make it, it’s hard to see how Linux is going to be a major factor in consumer or business PCs — at least in countries with high existing PC penetration rates.
• Adobe’s new Photoshop Express website got a very nice writeup in the WSJ — which basically said it’s about as good as the 1.0 of an online photo program can be. This shows that not only is Adobe trying to remake itself into a SAAS company, but its skills are transferrable. Also that by requiring Flash, its can continue to use its position in one software segment to boost another.
• Some (but not all) of the 4G wireless equipment makers agreed to a patent cooperating agreement to speed adoption of the GSM/W-CDMA derived LTE technology. It’s not clear if the parties have agreed to a formal pool or a set of rules — either for valuing patents or (as announced in August) for deciding which patents are essential. Given the past failure of telecom patent cooperation, this seems more like a promise to agree rather than an ironclad agreement.
• The patent “reform” bill S.1145 seems to be dying, with those big IT companies that want to weaken patents (e.g. Apple, Cisco) unable to overcome the opposition of those that like them just as they are. I wonder if anyone in D.C. understands “win-win” — such as recent efforts to make patent examination more rigorous and accurate.

Making sense out of chaos

On Wednesday, MIT meteorologist Edward Lorenz died. The official MIT obituary and various news reports (e.g. the LA Times) credit him with inventing chaos theory. Actually, more precisely, a 1972 AAAS paper by Lorenz coined the idea of the “butterfly effect”.

The 1972 paper has only a small number of citations in Google scholar, consistent with the known limitation of the Google metric for measuring influence in the 1970s and 1980s. However, Lorenz’ 1993 book, The Essence of Chaos, has 440 citations.

Alas, this is all a surprise to me. I had not heard of chaos theory (or his contribution to it), when I knew Prof. Lorenz as the chairman of the MIT meteorology department, a job he held from 1977-1981. In my last two years at MIT, I was an undergraduate meteorology major from 1977-1979; they didn’t have an official undergraduate major, so I designed my own (which was later copied by my classmates, Patricia and Norm, who unlike me used their forecasting skills after graduation).

At the heart of the major was taking 3 of the 4 required first-year classes for the S.M. degree in meteorology: 2 semester of dynamic meteorology (equations of air flow) taught by Lorenz, and 2 semesters of synoptic meteorology (forecasting with paper isobar maps) taught by Fred Sanders (who died in 2006). The first semester, I got As in both (my best semester at MIT) but because Lorenz’ class was more predictable (math rather than the black art of prediction), I only took his class in the spring.

The two men were as opposite as night and day. Sanders was gregarious, affable, perhaps a bit loud (or at least theatric), and eager to be liked; Lorenz was quiet, shy, and very transactional in dealing with students. As one of his successors at MIT, Kerry Emanuel, told the LA Times

Lorenz was also "a perfect gentleman, and through his intelligence, integrity and humility set a very high standard for his and succeeding generations," he added.

Lorenz, Sanders and my advisor Reginald Newell — at one point the world’s leading climatologist and the original global warming skeptic — were the backbone of the department, the concentration of midcareer (the most productive phase) talent then not available anywhere else in the world. (As a prospective grad student, I looked into it).

They accepted me for the PhD program, but at age 21 I was sick of school and returned home to California. So I didn’t get a PhD until 42, and in a social science on the West Coast rather than a physical science on the East Coast.