Margaret Thatcher, the formidable former Prime Minister of the United
Kingdom and leader of its Conservative Party, died this week at age 87,
and even in death she remains controversial and divisive.
I met the Iron Lady only in her less ferrous later years. While the big
hair and big handbag remained, the once-steely leader within had begun to
recede. What remained then and is much present this past week is Maggie
the icon and symbol. Her supporters and detractors continue to divide
neatly along political and geographic lines: She is alternately the
saviour of Britain and architect of its modern economy or the heartless
of its northern working-class. As with so much else concerning Lady
Thatcher, both may be true.
Was she right to break the back of the trade union movement in the UK? To
send an armada thousands of miles from home to reclaim the Falklands? Or
resist deeper integration for Britain in the EU? Fair minded people
can disagree on these and other aspects of her record in office.
What should be beyond debate is her victory for women in government and
diversity in general. However, even here, "the Lady's not for turning" to
borrow her oft-quoted phrase. In her politics, Margaret Thatcher cared
little for liberal concepts such as diversity and affirmative
action for minorities. However, as a very real symbol of equal
distribution of talent across the sexes and social classes, the grocer's
daughter did much to blaze the path for working women everywhere.
This week as Lady Thatcher is remembered for her often divisive speeches
and at times heartless policies, we should also recall what she achieved
for liberals everywhere -- the example of a strong-minded, principled
woman leading her nation.
Why would anyone in their right mind wade into the debate on bankers' pay who did not himself work for a bank? This is the unusual place in which I find myself, drawn irresistibly by the proposed EU legislation which seeks to cap bankers' bonuses at one times base salary (or, if two-thirds of shareholders approve and certain other conditions are met, two times base).
It is not surprising that such a law would prove politically popular – a similar but even broader initiative in Switzerland received 68% of the votes in a referendum this past weekend. After all, there are far more non-bankers than bankers, and financial institutions in Europe and the US have not exactly covered themselves in civic glory across the financial crisis, large trading losses and LIBOR-rigging, sanctions-evading and money-laundering scandals. However, if popular appeal is to be the measure of financial policy making then I would propose draft legislation requiring the ECB to deliver a one kilo gold bar to each non-banker in the 27-member Union.
It is said that bankers are "overpaid" and that the nature of their bonus compensation drives them to take wild risks with the capital of their institutions, and thereby put the savings of ordinary citizens and the finances of national treasuries at risk. Experience over the past five years has indeed suggested that many financial institutions were able to "privatize the gains but socialize the risks." However, this to me supports the case for higher capital requirements, firewalls to protect depositors, enhanced oversight and trading rules for derivatives, and even rules requiring clawbacks and deferred equity payouts. It does not make the case for caps on bonuses, unless the purpose is not promoting a more sound financial system but either societal revenge for bad banker behavior or a Continental stitch-up of the City of London.
First, let’s look at the issue of whether bankers are “overpaid.” What does this really mean? Overpaid relative to the tellers (if any remain) in the bank? Relative to teachers, firemen or other professions of perhaps greater societal value? I could get comfortable with such claims if applied consistently across all endeavors. Thus, are Lady Gaga, Tom Cruise and Wayne Rooney not similarly overpaid? While these individuals no doubt possess good performing or sporting talent, can it really be said that their contributions to society are worth millions? Are they more deserving? Do they work longer hours? I think not. They are simply the beneficiaries of specialized labor markets in the entertainment and sports industries. While it is true that a Rooney scoring slump is unlikely to cause a global financial meltdown, neither do I believe that capping bonuses are the best means to reduce systemic financial risk and protect small account holders.
Second, let’s look at the form in which compensation is delivered. Banks have traditionally paid most of their professionals a large portion of their total compensation in the form of variable pay (bonus) not salary. This has the virtue of not burdening the institution with high fixed costs during weaker periods and, paying their top performers more than their weaker ones. So, for example, if a star banker can bring in $25 million in business for the year would shareholders begrudge paying her 10% of the revenues and keeping the other 90%? Under prevailing practice such a banker is usually paid a base salary between $200,000 and $400,000 per year; however, if her bonus is now capped at one times base she cannot be paid more than $800,000 under the new law. The immediate answer is to raise her salary to $1,000,000 and then she can be paid total compensation of between $2,000,000 or $3,000,000 (if shareholders approve). However, this leads to two unintended consequences. First, if the banker in our example has a bad year and only brings in $5,000,000 in business, we will have grossly overpaid her in salary for weak performance. Second, we will have driven up the fixed cost base of the bank, and in the event of a downturn, the firm will have little choice other than to make deeper job cuts even if this is not in the interest of the bank, its shareholders or our banker.
Finally, my issue with the proposed bonus cap approach is that it will drive economic activity away from the regulating geography and away from banks into the large shadowy world of non-bank banks such as hedge funds. While the proposed EU legislation is intended to apply to the worldwide operations of EU domiciled banks and to the operations of foreign banks in the EU, it still leaves many institutions out of its ambit. So, for example, a Hong Kong based trader for Bank of China could be paid a 500% bonus, but his counterpart across the street at HSBC in Hong Kong would be limited to no more than 200%. How long do you think it will take for our trader to cross the road? How about HSBC itself? Have we forgotten that this mighty UK headquartered institution is after all the Hong Kong and Shanghai Bank? How long until it repatriates? Pity that the Prime Minister exhausted his goodwill in Brussels with his December 2011 veto of the Euro treaty rather than a fight such as the current EU attack on the primacy of the City – a set of rules which will actually hurt the UK economy.
A larger problem with the proposed EU legislation is that it only purports to cover “banks.” However, there are thousands of “non-bank banks” making loans, trading derivatives, and making markets in over-the-counter securities, among many other bank-like endeavors. The London based colleagues of our HSBC trader need only drive from Canary Wharf to Mayfair to join a hedge fund and be compensated freely. While it is true that hedge funds by and large do not serve small depositors, their investors do include the pension funds in which many ordinary workers participate, and if protecting depositors and the public treasury is the goal, there are, as argued above, better ways than compensation controls to meet these policy objectives.
The only good thing I can think to say about the new EU bonus-capping legislation is that it will serve as a stark reminder to other industries of the need to police their own houses lest they wish to let the politicians in to botch the job for them.
Perhaps I noticed it more starkly because I was sick and working a reduced schedule this week. Frankly with two kids in New York City private schools I usually ignore the daily onslaught of emails announcing school raffles, parent coffee mornings, walks in support of a variety of worthy causes and the like. However, the week I read them all. Including, all too frequently, the blast reply-to-all from the email-challenged parent confirming that Dakota's missing pink cardigan could not, unfortunately, be found in her daughter Tiffany's schoolbag.
Now, don't get me wrong. I think all parents have a moral obligation to take an active interest and involvement in their children's education. However, I was struck by the difference between the New York and London schools our children have attended. During the seven school years Mariana and Walter attended English schools, they received an excellent education from teachers who cared deeply about their students. Among their pedagogic talents, they had also mastered the use of the class email list. Nonetheless, they managed to resist the urge to over-communicate, or as their charges would say, they did not inflict the dreaded T.M.I.
It is, of course, easy to criticize and harder to suggest what level or form of school communication is optimal. Moreover, parents have different attitudes toward how much information is too much and they also receive different amounts of daily email. So, here is my suggestion for schools or other organizations to fit information output to the differing information needs and desires of their stakeholders. First, developing a sound communication strategy should not be conflated with establishing an optimal email policy. There are many tools available: web sites, community wikis, RSS and Twitter feeds, Facebook and Tumblr pages, YouTube videos and podcasts, Google+ circles, Instagram photo sharing, as well as plain old mail and telephone. Second, the individual seeking to share information should ask himself how urgent is the communication? Does it need to go to the entire community or just a subset? Is a responsive action required or is it just an FYI communication? Once these and other similar questions are answered a suitable communications strategy can be determined.
We all love our kids and we are all subjected to far more information than we can hope to process and act upon. Schools are in an excellent position to start establishing the norms of communication that their students will carry forward to their next schools, employers and other institutions.
Before I left for Winter holidays, I gave the keynote address at the annual fundraiser for the Japanese Chamber of Commerce In New York. I reproduce below the text of my talk.
What Japan’s Lost Decade(s)
Can Teach the West
Thank you – it is a great pleasure for me to be here today. When I was approached to deliver this keynote address I readily accepted because I feel a great debt of gratitude toward Japan and the Japanese people.
Let me explain why. My wife Maarit and I lived in Japan for the better part of the year 1989. It was a very special time for us. Let me remind you what was going on during this period.
The bubble had not yet burst;
The Nikkei was over 38,000;
Emperor Akihito was about to take the Chrysanthemum throne;
The Yomiuri Giants had just won the Nippon World Series;
Chonofuji was the reigning Sumo champion.
And, most importantly for our family, the American law firm, Davis Polk, decided to send me to their Tokyo office.
Now for the lawyers in the room, you know that one of the many healthy aspects of Japanese society is that lawyers, while respected for their learning, are not exactly seen as productive members of the business establishment.
I was treated with great kindness and generosity, and Maarit and I were fortunate to be adopted by a circle of curious Japanese friends who took great pride in showing us the splendors of the country, from the smallest shrine in Tokyo to the giant Buddha in Kamakura, with Kyoto, Mt. Fuji, Nikkō, and other attractions thrown-in along the way.
We learned a great deal from our gracious hosts, as I did in all my business interactions then, and across the next two decades when I travelled frequently to Japan for my next employer, Reuters Group PLC. And it is this theme of learning from Japanese experience which I have chosen to make the core of my talk today.
After the financial bubble broke in Japan in 1989/1990, the country entered a challenging period of deleveraging, restructuring and adjustment to low growth and deflation. These have been called (mostly by western pundits), Japan’s “lost decades” – although I always found the term inaccurate and somewhat disparaging, since many of my Japanese friends continued to live well and enjoy the fruits of a prosperous and culturally rich nation. I will come back to this point later.
Nonetheless, the title stuck, so I adopt it today with a twist:
“What can the West Learn from Japan’s Lost Decade(s)”
Since Western Europe, and in all likelihood the US as well, has entered a period of prolonged low growth, low interest rates and low inflation or deflation, and all these countries must tackle challenging deleveragings, it seems to me they have much to learn from Japan.
Let me read you what one prominent economist has written:
“We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress [which characterized the nineteenth century] is over; that the rapid improvement in the standard of life is now going to slow down [at any rate in Great Britain]; that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us.”
[JM Keynes, 1930, Economic Possibilities for our Grandchildren]
The author was not talking of the EU, US or Japan today, but of the United Kingdom in 1930 – and it was the great economist JM Keynes.
So why do these great deleveragings/recessions repeat? First a little economic theory.
Deleveragings in a given economy occur when the level of debt to income exceeds an amount that can be serviced. Fortunately, for all of us, such events do not occur often – the collapse of the Weimar Republic in the 1920s; and the Great Depression of the 1930s in the US are prominent examples. Unfortunately, we have entered such a period again, as can be seen in Japan during the last two decades; in the US post 2008 and in the Southern tier of Europe today.
While these dramatic deleveragings occur only once a generation, the lesson of how to overcome them is reasonably well understood, even if not universally practiced. In general, there are four tools which can and should be used to restore the debt to income ratio of an economy.
2. Debt reduction (through default or agreed restructuring)
3. Wealth transfers from rich to less rich; and
4. Debt monetization
Since I’m not a trained economist, I will not go further into the theory, but turn instead to the experience in Japan.
While private sector debt has been reduced in Japan and the overall economic conditions have improved slightly, government borrowing and deflation have caused total debt to rise toward 500%. Thus Japan has remained stuck in a difficult deflationary deleveraging for some 20 years, with nominal growth (real GDP plus inflation, or in this case minus deflation) trailing nominal interest rates. What I believe is needed is a healthy dose of debt monetization – or the printing of money – to reflate the Japanese economy and begin to bring the debt to income level into balance.
This, perhaps, is the one lesson Japan could take from the actions of the US Fed under Ben Bernanke. And the decisive election on Sunday of Shinzo Abē, who campaigned on a platform of looser monetary policy and stimulative works projects, is an indication that this lesson is being applied.
But let me turn now to the more numerous lessons which the Japanese experience can teach the West.
1. First, I would list the importance of social harmony or at least social cohesion. Sadly, I saw this at work when I visited Japan in the weeks following the Tohoku earthquake and resulting Tsunami. I have always been impressed by the willingness of the Japanese people to unite for a collective goal.
2. Second, and closely related, a more narrow (some would say more equitable) distribution of income, education, healthcare and other core social goods. For example, the Gini coefficient for Japan averages about 10 points more favorable than the US across World Bank, UN and CIA measures.
3. Third, a savings culture which has largely internalized the national debt. While this dampens consumption and therefore income, it means the Japanese are not beholden to the debt-purchasing whims of foreign powers – unlike Greece, Spain and, indeed, the US.
4. Fourth, an advanced manufacturing base which has the power to compete globally while maintaining good jobs domestically. Modern Japan’s success here owes much to the historic cultural traits of Monozukuri (or making things) and Kaizen (continuous improvement).
5. Fifth, world class public infrastructure from Shinkansen bullet trains to bridges, ports and roads that support a very integrated supply chain.
6. And sixth, in my view, a more human and humane conception of the purpose of economic growth and its relationship with the common good of the nation and of the environment.
It is this last point I would like to develop a little bit further and then conclude with.
In a remarkably prescient article in the Fall 1995 edition of Foreign Affairs, Eisuke Sakakibara, a prominent MOF official, questioned the West’s obsession with economic growth as an end in itself. Noting the tendency of what he termed “Progressivism” to pit one nation against another to drive economic activity beyond the capacity of the environment to support it, Sakakibara questioned the accepted model of unlimited consumer-driven growth. Since the end of the Cold War and the defeat of communism as the only significant rival to Western Progressivism, the logic of pursuing economic growth for its own sake has gone largely unchallenged.
However, what if the two “lost” Japanese decades are not so lost after all. What is wrong with a country which has an unemployment rate of 4.5%? A per capita wealth greater than the US and a positive balance of payments?
So to conclude I would emphasize two core lessons which Japan can teach the West:
First, the importance of social cohesion and national unity at a time when we see daily news videos of violence caused by the economic restructuring in Europe.
And second, the need to reflect more broadly on what should be the goals of contemporary society: (i) economic growth at any cost or (ii) the greatest good for the greatest portion of society consistent with peace among neighbors and the protection of the environment.
As with all my visits to the country, I find that Japan has much to teach us.
* * * * * * * * * *
is my latest post to The Economist's
Lean Back 2.0 blog, reproduced for convenience below.
Major events that occur in the physical world like Hurricane Sandy often remind me of how far we have come as a society in the great analog-to-digital conversion of our times. While weather forecasting and a significant amount of civil preparedness and communication rely on the internet, the devastating impact of the storm is a tragic reminder that we still largely inhabit an analog world. Two Sandy stories, in particular, caught my attention.
First, the New York Stock Exchange, led so ably by Duncan Neiderauer, made heroic efforts to reopen its equity trading floor on the third-day of the storm, while much of New York City, including the schools, remained closed. This would simply be another noble story of recovery, were it not for the fact that a majority of equity trading has long since moved to electronic trading systems, including those operated by the NYSE itself. This raises the obvious question of whether physical threats such as more frequent “once a century” weather events and the ever present risk of terrorist action should not accelerate the transition to all-electronic trading, which can be made resilient through remote disaster back-up systems.
The other Sandy story came from a close friend who visited a local New York bookstore a couple of days after the storm. He told me how shocked he was to see the store security guard eject a polite woman who asked to charge her mobile phone via one of the store’s electrical outlets. In fact, my friend was so surprised at this lack of community spirit at a time when so many were without power that he questioned the store manager. The latter simply stated that it was “corporate policy” of the national chain to which the store belonged.
I cite this last example not simply to highlight how insensitive some businesses can be, but also how misguided bricks and mortar retailers can be in formulating a winning strategy in the face of the Amazon digital onslaught. One of the few advantages such real world retailers still possess is that they actually inhabit the real world. Far from shunning potential or perhaps existing customers in need during a time of crisis, these stores should be setting up free charging stations to help members of the community. This particular book selling chain (and there are very few remaining) had previously recognized the benefit of encouraging potential shoppers to spend more time in their stores by installing Starbucks branches in its larger units.
So what do these two Sandy stories have in common? In the NYSE case, we see an example of an institution clinging to an analog model when completing the transition to digital would reduce cost and improve reliability. In the book seller case we see a large corporation that failed to use the physical presence it possessed to compete on service with online retailers which had every other advantage. Strategy consists of accurately assessing your relative strengths and weaknesses and then acting upon them in the face of external events. With climate change likely to increase the variability of weather events, we should all consider and regularly adjust our analog to digital strategies.
I cannot remember a US Presidential campaign in which the debates between the candidates and their running mates have drawn so much attention, both from the public and the commentariat. Watching the three debates to date, I was reminded how free with and of the facts the candidates wage their campaigns. This hardly comes as a revelation, but then I began to ponder what if the tapestry of rules governing public statements by corporate executives also applied to politicians? This could take media "Fact Checks" to a whole other level.
To remind those of us who did not spend their formative years practicing securities law, US Federal law imposes strict constraints on what, how, and when the executives of a public company may disclose information. The Securities Exchange Act of 1934 and the rules promulgated by the SEC thereunder set forth the basic (but hardly the exclusive) disclosure and anti-fraud provisions of US law. Under these rules, it is illegal "to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading."
Having lived by this standard for my 10+ years as the CEO of a public company, I fully support the objective of creating and maintaining fair and transparent public capital markets and punishing those who seek to lie to their shareholders or trade on inside information. In addition, the corporate scandals of the past 20 years such as Enron and WorldCom have led to the piling on of additional rules including Sarbanes-Oxley and Reg. FD, which, among many other things, govern the timing when disclosures may be made and require the CEO and CFO of public companies to make quarterly certifications as to the integrity of the financial statements and the quality of corporate controls. Again, I have no issue with these provisions.
What I do find perplexing is that similar anti-fraud rules do not apply to the public statements, written and oral, of candidates for political office. When Governor Romney said in the second presidential debate that President Obama has doubled the deficit he was clearly making "an untrue statement of a material fact," a point which has been brought repeatedly to the attention of the Romney campaign. However, President Obama was also guilty of a least an omission of a material fact when he claimed that he had cut taxes by $3,600, since he failed to mention that this amount was cumulative over four years and not likely to be realized in full unless the Bush tax cuts and the payroll tax reduction were extended in their entirety.
I could cite numerous other examples, as the candidates have themselves about the other, but I would not presume to judge the "he said; she said" debate. Rather, I merely point out that it seems strange to me that we choose to elect the most powerful man on earth through a process in which an unlimited amount of money can be spent to distort, obfuscate and downright lie. Either we, as a nation, are saying that public capital markets deserve to be protected from untruths and half truths because they are important to us, but the US Presidency does not merit such protections, or we naively believe that a billion dollars of free speech by each candidate can permit the truth and the best candidate to prevail in a protracted and dizzying war of tit for tat.
More likely, we know the electoral system is badly broken, but we lack the political will for the Constitutional reforms necessary to reform it. So what might those reforms look like? Would we want candidates and their campaign managers to be liable for up to 25 years imprisonment and $5 million in fines as they would be under the US securities laws? I think not. The solution and any penalties should fit the crime.
US Presidential campaigns are too long, too costly and too free of fact. First, I would limit all political campaigns to a duration not to exceed 25% of the term of office being sought – thus Presidential campaigns could last up to one year and contests for the House of Representatives could run for only six months. This might help candidates actually work on the significant policy challenges they were elected to tackle and not merely begin running for the next election on the first day of their current term.
Second, I would require the federal funding of all elections for national office and cap the amount at (say) 25% of that spent in 2012. To be effective, campaign spending by third parties would also need to be limited. So for example, no individual, company, labor union or other entity should be permitted to contribute or otherwise spend money, directly or indirectly, individually or as part of any group, in excess of $100 during the shortened election campaign.
Finally, I would require candidates to produce and file a written policy paper setting forth their position on all major issues, much as corporate executives must file annual and quarterly reports, proxy statements and prospectuses. Candidates would be free to conduct the same rallies, debates and town hall meetings as today; however, if they materially departed from previously filed positions, they would be obligated to amend or supplement their disclosure documents. This is very much the way in which public company disclosure works today, with press releases and webcasts to update more formal disclosure documents.
The recommendations outlined above raise obvious Constitutional issues, starting with the freedom of speech. However, even the rights under the First Amendment, much loved in American jurisprudence, are not without limit. Citizens can be stopped from disclosing sensitive national security information such as troop movements or restrained from yelling “fire” in the proverbial theatre. Moreover, no corporate executive expects to be able to exaggerate company revenues or make knowingly false promises without fear of punishment. A non-partisan body would need to be created with SEC-like powers to enforce these rules - - perhaps a Federal Election Commission with real teeth.
All of these proposals would require a fundamental overhaul of the current US election system, including a range of Constitutional amendments to make them possible. Others can undoubtedly improve on the mechanics of my suggestions – -- I intend them as a provocative straw man rather than a complete legislative agenda. However, I have yet to meet the voter or even the candidate who believes we are well served by the current system. We deserve better.
Over the long Columbus Day weekend in the US, I participated in a conference held on beautiful Nantucket Island named, appropriately enough, The Nantucket Project (www.nantucketproject.com). Now you might well be thinking why does the world need yet another "thought leadership" conference on top of the World Economic Forum (Davos), the Bohemian Grove (California), the Allen & Co. Conference (Sun Valley), the Aspen Ideas Festival, SXSW (Austin), DLD (Munich), Bilderberg (originally, The Netherlands), All Things D (California), Le Web (Paris), and TED (everywhere) to name but a few.
The truth is that many great panel discussions have been held and many great keynote presentations given, but we seem no closer to solving our great societal, environmental, political or economic problems. Nonetheless, it was with my usual sense of optimism that I jumped on the short flight to this postcard-pretty summer resort for the East Coast establishment. I was not disappointed. The Nantucket Project, now in its second year, is the creation of a small group of civicly-minded Island families led by Tom Scott (founder of Nantucket Nectars) who seek to "bring together leaders from a wide range of disciplines to explore the most relevant, cutting-edge ideas and examine the implications they have for culture, society and business."
This year's participants included Sen. John Kerry, Peter Thiel (PayPal, Founders Fund), Eric Schmidt (Google), Stephen Wolfram (Wolfram Alpha), Toby Cosgrove (Cleveland Clinic), David Gergen (CNN), Chris Matthews (CNBC), Larry Lessig (Harvard) and Jonathan Zittrain (Harvard). I moderated several sessions including a lively panel on the Future of Finance in the Age of Radical Transparency, featuring Bob Diamond (former CEO Barclays), Eddie Lampert (Chairman of Sears and ESL Investments), David Rubenstein (co-founder Carlyle Group) and Larry Summers (former US Treasury Secretary and Harvard President).
I took an intentionally provocative position as moderator to argue that much of the current public company disclosure scheme is a waste of time and effort aimed at positioning or "spinning" quarterly or annual results and interim corporate developments which could one day be replaced by publishing weekly or daily revenue, cost and balance sheet figures directly to the internet. As desired, I got plenty of pushback from the panel who sensibly argued that no CEO would want to learn of his company's results at the same time as the public and that this could introduce perverse incentives to manipulate underlying transactions. I remain unconvinced as to much operating data, but I do believe that just as diplomatic communications should remain immune to Wiki- or other leaks so that diplomats can negotiate and brief their superiors, so should certain corporate developments such as merger plans and new product designs remain subject to protection.
We went on to debate such interesting (at least to me) topics as the blurring distinction between what it means to be a public or private company in the age of active secondary markets, relaxed solicitation rules courtesy of the mislabeled "JOBS Act" and delayed IPOs. There was a general consensus that this trend had accelerated in the last several years, with greater transparency now available with respect to even "private" companies, but that there remained important differences. After staying faithful to the conference's overarching theme of testing the limits of "collective intelligence" for the better part of the hour, I asked the panel to offer their views on the "fiscal cliff" faced by the US at the end of this year and the prospects for recovery (or at least stability) in Europe. The conclusions, not surprisingly, were that the US would rise to the occasion and at least partially address the fiscal challenges facing the nation (strongly supported by Senator Kerry later in the program) and that the EU would stay united, but with little enthusiasm and many nervous moments to come.
What impressed me about the Nantucket Project 2012 was (1) the broad range of topics covered, from politics to economics to healthcare to pure science; (2) the sense of community that arose from holding all the sessions in one large tent, thereby exposing the politicians to the science and the doctors to the economics; (3) the commitment of the presenters to stay and participate in other sessions rather than just fly in and out; (4) the request by the organizers to push the envelope and not just rehash talking points; and (5) the beauty of Nantucket as backdrop and playground. I would also credit the programming, organization and participation by the great team from BigThink.com, led by Victoria Brown and Peter Hopkins. In the interest of full disclosure, I have a minor advisory role at and financial interest in the company — too small to deserve any credit for their success, but large enough to provide me a good window on their talents.
France may be the birthplace of Cartesian logic; however, these rationalist roots are nowhere to be seen in President Hollande's proposed economic and tax policies. I have written before in this blog to criticize then candidate Hollande's plan to reduce the retirement age in France from 62 to 60, enforce the 35 hour cap on working hours, and raise the top tax rate to 75% (actually far higher when social charges are included). These are not only fiscally reckless for a nation with a stagnant economy, a huge public debt and generous social benefits promised to an aging population, but they reinforce a view, already all too prevalent in France, that work is some horrible affliction designed by evil plutocrats to interfere with "real life," and which should be restricted to the smallest corner of that life as possible.
I did not expect Francois Hollande, once at home in the Elysee Palace, to suddenly succumb to free market fever, but I did expect him to be consistently socialist. A candidate who declares that he hates "rich people" should stick to his guns. Thus, it came as quite a surprise when I learned this summer that Hollande was proposing to create an exception to the confiscatory 75% tax bracket for professional athletes and creative talents. Now those who know me well can attest to my love of Euro Cup calibre football and French art and film, but I cannot see why Zlatan Ibrahimovic deserves millions at PSG but a self-made man like Maurice Levy who built the advertising agency Publicis into a global power does not.
I do, of course, see the awkward policy position President Hollande backed himself into because it would certainly be embarrassing if French club teams consistently lost against international competition when the talent (including French players) chose to sell their skills elsewhere. But what if it didn't matter? What if the Messis, van Persies and Ballotellis are no more talented than the sub-one million Euro players? Why not tax all workers who earn more than one million Euros at the top rate? This at least would be a consistent policy and would be an interesting experiment to run, with the downside limited to disappointed football fans. If this is not an appealing prospect, then why run the same experiment in the business world when the risk is fielding a second-string team to help grow the economy?
The answer can only be that French society believes that talent matters in sports and the arts (and I agree), but that it does not matter or at least not that much when it comes to running companies and other institutions. Putting aside my reservations about who is competent to deicide which occupations require talent and which do not (what about brain surgeons?), as an investor I do not want to put my money into a company that is at a significant government-imposed disadvantage when hiring and retaining talented staff.
So what I learned on my summer holiday in France is that the country remains a great place to take a vacation.
Another exceptional Sun Valley conference courtesy of the publicity-shy Allen & Co. What goes on in Sun Valley stays in Sun Valley — those are the rules of the road. While the grateful invitees by and large respect these rules, certain of the attendees come with the express purpose of raising their profile — these are the young companies featured in the annual "New Breed" session. The 2012 edition saw Cloudera, Evernote, Nextdoor and Uber. Of these I regularly use Evernote and Uber, and it is on Uber that I wish to focus in this post.
First, let me state that (unfortunately) I have no investment or other interest in Uber beyond being a loyal user of the service. When I do have a financial interest in one of the companies I mention in this blog I disclose it. What drives me to discuss Uber is my satisfaction with the service as an ordinary user and my interest in the larger technology themes it raises. What Uber does sounds ordinary enough – the booking of livery cars (radio cars) via smart phone in major cities. However, they make it so easy, the form-factor and feedback is so good, and the role they play for both driver and passenger so useful that they have won me over as fan and loyal user.
The way it works is simple: You download the Uber app to your iPhone or other smartphone, enter your credit card once to be stored on an Uber server and you are ready to go — literally. When you open the app you see a Google map centered around your current location; you also see a bunch (especially if you happen to be in San Francisco) of small black icons in the form of cars. These are available car service sedans or SUVs which are part of the Uber network and ready to respond to your call. To book a car to come pick you up at your current location, you simply push one large button to register your request. The system then assigns the nearest driver, gives you an estimated pick-up time (generally 2 to 4 minutes in San Francisco and 5 to 7 in New York) and you can watch your car approach on the screen. You also often receive a photo of the driver, his crowd-sourced rating, and license plate number. Fares run generally twice the prevailing taxi rate; no money changes hands as the trip gets charged to your credit card on file with Uber (not the driver) and no tip is expected. After completion of the trip Uber emails the customer a receipt showing a graphic of the route taken, the charge and other relevant information.
Over the past six months I've used Uber in San Francisco, New York and Washington DC, and I look forward to using the service in such notoriously difficult taxi cities as Paris. Besides being a great service for users, I am impressed with what Uber represents: another example of the internet removing friction and associated transaction costs to empower a new service which was uneconomic before. The use of radio cars is obviously not a new idea. Typically these have been used by companies and professional firms as well as individuals for airport transfers and the like. Booking such a car has usually involved a call to a dispatcher, as has getting an updated ETA or other information. What Uber does is eliminate the dispatcher with more efficient AND informative technology, as well as enable radio car drivers to turn idle wait times into productive trips by making themselves available on the system. From the user perspective, not only is the service more transparent and efficient (think FedEx since the advent of internet package tracking) but also far easier to use. You walk out of a meeting, decide that you don't feel like walking and punch one button on your phone — it does not get much easier than that.
I only wish air travel could be so simple.
I have been watching the sad progression of events in the Barclays Bank LIBOR drama and, true to form, have a few unfashionable observations to make. I won't here repeat what is known of the facts of the case other than to state what is accepted: Barclays has agreed to pay a 290 million pound fine to settle charges that during the 2008 financial crisis it submitted estimates of the interest rates at which it could borrow in the London Interbank market below the levels at which the Bank then could actually borrow.
First the uncontroversial: What Barclays did is wrong, possibly unlawful and merits the punishment of the relevant employees, at least their direct supervisors, and the institution.
Now the less politically correct.
1. Barclays was late to the false interest rate party; other less creditworthy banks submitted lower estimates; and Barclays only fell into line after at least a suggestion from their UK regulator that the Bank need not be so out of line. [Note to self: Always get it in writing]
2. It is unlikely Barclays' false submissions actually influenced LIBOR as calculated.
3. Even if LIBOR was nudged downwards, the average homeowner holding a LIBOR-adjustable rate mortgage would have benefited. [Full disclosure, I am one]
4. There was a global financial crisis raging at the time of the false submissions and the UK benefited from Barclays not seeking the government bailouts required at RBS, Lloyds and Northern Trust.
5. Barclays cooperated with the UK and US investigations and was the first of what are likely to be several institutions which will be found to have submitted false estimates.
6. CEO Bob Diamond was pressured to resign by the Governor of the Bank of England, the Chairman of the FSA and the very active intervention of the Chancellor. This would appear to have more to do with Bob's reputation in the eyes of the British establishment and the words of a former minister as "the unacceptable face of capitalism," than a thoughtful evaluation after all the facts were in as to his actual culpability in the affair.
7. Diamond was seen as the all-too visible and voluble leader of a gang of American investment bankers who somehow corrupted the theretofore pristine British banking culture. [Note to self: Am I the only observer old enough to remember what a cesspool of insider trading and crony capitalism the City was before the 1986 Big Bang?]
8. Bob Diamond led a team which transformed the vestigal Barclays' BZW markets unit into a world class global bank.
9. I am doubtful that Barclays and its shareholders will be better off for Diamond's departure as predicted by the Chancellor.
10. The Barclays' Board should find a way to retain Marcus Agius as Chairman. Amid so much turmoil and leadership turnover, the institution needs some measure of continuity, and Marcus is a very decent, honorable and talented banker.
I was asked by The Economist magazine (they call it a newspaper, but this is a small conceit for a publication I hugely admire) to contribute to their new Lean Back 2.0 Blog. My first piece can be found at The iPad and the future of paper.
I encourage you to read the other interesting posts collected there, but for ease of reference, I reproduce my contribution below.
A little more than two years ago I wrote a piece on my blog entitled “iPad and Beyond“, which celebrated the launch of the first iPad. In the post I argued that we should not view iPad v.1 as the final destination, but rather “a trail of breadcrumbs along a path to the future of media.” What I meant and still believe is that industry analysts have a tendency to look at a product – the iPad, the world wide web, cable television – and draw sweeping conclusions concerning the “future of media” or “the death of newspapers” based on a static product snapshot. To me this is akin to valuing an ongoing business on the basis of a balance sheet but not an income statement and forecast. Thus, only an analysis which captures the dynamic progression of technology should be used to support such grand conclusions.
While in my original post I accurately (but none too bravely) predicted future versions of the iPad would have 3G/wifi connectivity, a longer battery life and a better screen, we have not yet seen my bolder prediction of lightweight digital plastic sheets becoming the new print medium. This will come. As has often been noted, technology appears to evolve slowly in the near-term and then very rapidly over longer timespans as we consistently underestimate the compounding effects of incremental development.
While the iPad3 I use today is an impressive and enjoyable machine, it is but a hint of things to come. Many await Apple’s entry into full screen home television – likely with a further evolved Siri voice control; however, I am still waiting for the re-invention of paper. That’s right, paper. What we call paper today has evolved over centuries from stretched animal skins to papyrus to wood paper pulp. It is lightweight, foldable, easily transportable, readable in bright light and relatively cheap. However, in its current “wooden” form, it is not immediately reusable, not searchable and comes with an environmental cost.
While there have been several attempts to date to create high quality digital paper (e.g., Plastic Logic), none has yet delivered a user experience as good as the iPad with the benefits of the traditional paper form factor. Imagine the simplicity of having your weekly subscription to The Economist or your daily newspaper downloaded overnight to your “digital paper.” Crowded train? No worries, simply swipe a finger to turn the page. Loss of classified advertising threatening traditional newspaper dynamics? How about an integrated voice-controlled search box to query the contents of today’s paper, the archives or the broader internet.
These useful features are not only possible, they are likely. With them our notions of what is “paper,” what is a book, what is television will also change. Many traditional newspapers have begun featuring video on their web sites and mobile apps – why not on the front page of their eventual digital paper? Color photographs in newspapers were also once unthinkable – even after they were technically possible.
One market in which we can see these changes unfolding is book publishing. New electronic publishers such as Byliner are not only publishing traditional books and short stories, they are pioneering new mid-length serious writing by authors including Margaret Atwood, Laurence Lessig and Buzz Bissinger (full disclosure: I thought so highly of Byliner, I bought a small equity stake in it). Technology continues to evolve making new devices possible; artists, journalists and novelists experiment with these new form factors and create original works; and entrepreneurs challenge traditional economic models and build entirely new businesses.
The iPad3 is only the beginning. The story of digital content is a fast moving river, replete with dangerous eddies and currents for the conservative paddler. Wooden paddles may give way to fiberglass and later carbon fiber, but life on the river remains good.
For the last several years, I have been writing about the threats posed by the over-indebted West. These are not only threats to the economies of Europe and the US, but also to the very political foundations of these states. While the United States has so far enjoyed a 'bye" from the debt capital markets, European sovereign states, at least those of the "Club Med," have been less fortunate. Last weekend, European leaders finally started to tackle the burning issue of recapitalizing the precarious Spanish banks before nervous depositors took the issue into their own hands. By end of the day Monday, the markets were unimpressed, but at least the Eurozone is finally tackling the core issue -- as the US learned in 2008 when the TARP was converted into a bank recapitalization fund.
These financial machinations can appear highly technical and esoteric -- and in many respects they are. However, it would be a mistake to underestimate the economic (and potentially, political) reset coming. This was plainly brought home to me on a recent visit to France. My wife Maarit and I spent a few days in the South of France in May where I was speaking at a conference. We stopped for lunch one day at a casual beach restaurant where we have been going for years, and not only enjoyed a typically good meal, but also a lesson in European economic alchemy. When I asked one of our favorite waiters how he had gotten through the unusually harsh winter, he replied that it had actually been a very good season. He and a couple of his colleagues had not only taken their usual overseas winter holiday (Mexico), they had taken a second trip to Miami and New York.
In prior years, I had always admired and marveled at the quality of European life which afforded the average waiter ample time off and the opportunity to travel. However, this year I began to worry. Would the average waiter in San Diego be able to afford, let alone expect, even one foreign vacation each year? Was this a special defect of the American capitalist system, or was my French waiter soon in for a shock? Certainly not the latter if the new French government can fulfill its promises. The freshly elected Francois Hollande promises that France will reduce its deficit to under 3% of GDP – already quite a challenge — but also lower the retirement age to 60 (from 62) while hiring 60,000 additional teachers.
I hope I am proved wrong, but the Hollande fiscal program, like so much of the post-war European agenda, seems destined to continue the financing of this generation's above-budget spending at the expense of their children. If, like my favorite waiter, you are childless, then you are only piling debt onto someone else's children; however, I doubt the crime is this knowing and cynical. Rather, successive generations of politicians have encouraged this inter-generational borrowing by recklessly promising that the average worker can work a 35-hour week; take long vacations; retire at age 60; enjoy free education and healthcare, and still remain competitive in a relentlessly global economy. This is not only bad economics, it is politically exploitive and insulting.
The United States has the benefit of some time (and scale) to avert this train wreck. We would be wise to not to assume that the credit markets only punish Mediterranean-bordering borrowers.
While I was growing up in New York I watched a lot of television despite the admonitions of my school teachers . My two favorite programs were Star Trek (the original series) -- yes, I'm that old, and Hogan's Heroes. The latter show was very funny but had almost zero intellectual content other than perhaps predicting the creation of the EU in the sense that the English, French and Germans on the show all got along well despite the fact the show took place in a Nazi POW camp.
Star Trek was different. The original series produced by Gene Roddenberry was full of philosophical and technological content. Tricorders, matter/anti matter propulsion, medical scanning beds, cloaking or stealth shields and transporter machines. We forget how prescient the writers of the series were in the mid 1960s because so much of the then science fiction has turned into accepted contemporary technology.
I was reminded of my admiration for the original Star Trek series twice recently. First, rummaging through some old files, I found a yellow campaign pin, circa 1967-68, which read "Nixon is only a Klingon in disguise." [For the non-Star Trek cognoscenti (if one can ever use that term to refer to a very nerdish community), the Klingons were pointy-eared enemies of the Federation good guys.] Second, the US administration's increasing fondness for Predator drone strikes (in action in Pakist again today), reminded me of a Star Trek episode in which the crew of the Starship Enterprise encounters an advanced civilization on the planet Eminiar VII which has been at war with its planetary neighbor for generations. The interesting aspects of this war are that (i) no one on either planet can remember why the war began or why they are still fighting and (ii) no weapons are actually fired. Instead, these "advanced" societies have long-since moved beyond the crude form of warfare still more or less current on earth, in favor of computer simulations of the destruction that kinetic weapon strikes would have had. Once these simulations have identified the putative victims of these attacks, they are required to report to liquidation centers to be killed quietly and with no collateral damage.
The verile Captain Kirk will have none of this. In the episode he berates the leader of Eminiar VII for continuing to meekly follow this bloodless war protocol, notwithstanding the latter's protestations that this is the most advanced, humane and civilized way in which to wage war. Kirk's winning (of course) argument is that by so attenuating the gory and repugnant aspects of true warfare, these self-proclaimed advanced civilizations had established a means by which to fight an endless war without the usual attendant mayhem.
So why does this 40+ year-old example of science fiction remind me of current US Predator drone warfare? It is of course, the "stand-off" nature of the combat; the very attractive (from an American viewpoint) ability to project violence without putting American human forces in harm's way, and the computer-controlled seeming precision of the affair. What differs, of course, is that in the Star Trek episode, both warring planets possessed the relevant technology, but so far in real life, only the US can project such lethal force. This will, of course, change.
There is another, less immediately apparent, manner in which the US is able to wage war without putting too many of our sons and daughters in theatre. First, by using an ever increasing number of contractors (I would just call them mercenaries). Second, via a volunteer army whose members are increasingly drawn from the less well-off. Now don't get me wrong; I am deeply grateful to live in a society in which my young children do not expect to serve (at least unwillingly) in combat. However, I do worry that our political leaders are somewhat more willing to take the nation to war because the consequences (at least to the most influential members of the electorate) are more attenuated.
Star Trek teaches us to be wary of the sanitization of war.
What if every wrong does not have a remedy; every pain, a pill; every
injury, a cause of action? What if, in each case, the cure were worse
than the illness?
This is a tough choice for government and for the governed. It requires
great legislative, executive or judicial restraint, often in the face of
true human suffering, not to create some new government solution.
However, this is what I believe we must be prepared to do if our
societies are not to become ossified webs of regulation.
This is not some personal frolic into far right conservatism or
libertarianism. I have always believed and continue to believe that
there are two core functions of the nation state: To protect its people
and to preserve their liberty. These always exist in a certain dynamic
tension; however, of late I have begun to worry that, at least in the US
and Western Europe, the balance is overly tilted to nanny-state
Unfortunately, bad stuff sometimes happens to good people. Cancer and
other disease is an obvious example, so are many other less
life-threatening conditions. Let's imagine that this morning Glocer the
Klutz slipped and broke his leg in the shower. Not a good way to start
the day, but also not to my mind ground to sue the bathroom tile
manufacturer for failure to affix a warning label reading: "Danger, May Be
Slippery When Wet." Similarly, but on a grander plane, some real bad acts
were committed in the US mortgage banking crisis, but that does not mean
that the right answer for society at large is the passage of the
Dodd-Frank legislation and its tangled web of implementing regulations.
Here is the crux of the issue: It is very difficult in the face of a
specific bad outcome to stay the legislative hand from enacting new rules
that, when added to all the existing and accelerating lawmaking, do not
make society as a whole worse off. Or, as I learned in law school, bad
facts make bad law. What makes this a particuarly difficult issue is that
the bad outcome is known and measurable, but the benefits of liberty
are general and unquantified. I cringe each time a sitting President of either
party points to the upper tier of Congress during a State of the Union address
and singles out one American citizen by name (usually seated next to the First
Lady) as deserving of some government-privided solution. You can almost
feel the surfeit of legislation to come.
This phenomenon is not by any means limited to lawmakers. So, for example,
when a civil jury awards millions in damages for pain and suffering in the last
seconds of an accident victim's life, the money is not a "free" good; rather it
will be funded through small increases in the insurance costs for all of the
responsible citizenry. It would be far more efficient for society to provide
adequate healthcare generally to accident victims than to use the courts and
juries to allocate lottery-like awards to the specifically litigious few.
One person who has been doing more than just talk about these issues is Philip K.
Howard, author of The Death of Common Sense (subtitled "How Law is Suffocating
America"), founder and chairman of Common Good (www.commongood.org) and cited
favorably in prior posts to this blog (see Debt vs. Equity --The Ossification of Economics
and Politics). Core to Phil's message is that the continual enactment of new laws, much
like the successive hardening layers of lava in Pompeii, have ossified and buried the ability
of the Nation to govern itself. What we are left with is a modern America in which good
people elected to high office with the best of intentions find themselves incapable of
using their best judgment to govern in our common interest.
As Phil writes:
"Today Americans are tied in legal knots, and can’t use their common sense.
Teachers are diverted by endless bureaucracy. Doctors are paranoid about lawsuits.
Officials have their noses in thousand-page rulebooks... Even the president is
stuck, unable to approve environmental projects without a decade of
review… To fix things, however, officials must be free to do things differently.
There’s only one solution: Allow officials flexibility in exchange for individual
accountability if they abuse their authority."
Rather than Tea Party conservatism or Occupy Wall Street nihilism, we need a national reset. A return
to common sense for the common good in which we stop trying to micro-manage every individual
outcome in a nation of 300 million, and let good people get on with the serious job of governing a great
I have written frequently in this blog about many countries I admire, most recently Brazil. However, there is only one country to which I am very attached and in which I have lived, worked and owned property, but which has not featured prominently in these pages. That country is France.
What prompts me to write today about this always elegant, usually rational and sometimes maddening nation is the current race for President of the Fifth Republic. Even by French standards this years's campaign is shaping up to be a campaign of economic suicide. The first round of the election will be held on April 22 and if, as is likely, no candidate achieves an outright majority, a run-off between the top two candidates will be held on May 6. The two current front runners are the incumbent President, Nicholas Sarkozy, of the center-right UMP party, and the current leader, Francois Hollande, of the Socialist party.
What I find remarkable about this election is the economic policy upon which Hollande is campaigning. He has promised to reduce the retirement age from 62 to 60; raise the tax rate on high-earners to 75%; renegotiate the recently-agreed European fiscal treaty; and wage war against "le monde de la finance." Now, if Europe, including most pointedly, France, were not facing a near-existential financial crisis, these sort of campaign promises could be dismissed as harmless populism, but the stakes are much higher this election. First, Europe is by no means out of the woods despite the breathing spell afforded by Mario Draghi's decisive action at the ECB. Second, Hollande is not just a fringe candidate seeking to motivate his faithful; the polls have him well in front with less than two months to go before the expected run-off election. Third, these are not ordinary times – global markets remain on edge – and these are not merely symbolic measures like Lionel Jospin's mandated 35-hour work week in 2000. Finally, responsible governments in Europe are going in the other direction, seeking to raise retirement ages not reduce them.
In fairness, President Sarkozy has also staked out some economically indefensible positions. Playing to the extreme right, Sarkozy has vowed to slash immigration in half which is not only questionable on humanitarian grounds, it is bad economics (at least in the longer run) for a country with an aging population and a low birth rate. Otherwise, as far as I can tell, President Sarkozy has done a decent job in office, but when I expressed this opinion recently to a French friend, he replied "we just can't stand to watch his face on TV any longer."
So as things stand now, France is likely to elect a new president within the next two months. Perhaps, as Hugo Dixon has argued recently in Reuters Breaking Views, this is not as dire economically as I make it out above because Hollande's "reforms" are likely to be heavily caveated and watered-down. However, as someone who believes that too many continental governments have been pandering to their citizens and delaying their day of reckoning for much of the post-war period, this latest election contest strikes me as one more good crisis wasted. My only worry is that the next one will be worse and the ECB printing press will have run out of paper to print.