Philip Greenspun’s Weblog

Buried in the ocean of news regarding our three wars has been what I think is the biggest U.S. economic story of the year: the federal government’s lawsuit against Boeing, seeking to prevent the opening of its $2 billion factory in South Carolina, for which 1000 workers have reportedly already been hired (in case you missed the news altogether: story, story, story).

Whatever the ultimate decision in the lawsuit, the very existence of the dispute will change the business landscape here in the U.S. for the next decade or two. First, the fact that this happened to Boeing, a company with vastly more political power than average (you might say that it is practically an arm of the federal government itself) is significant. There are hardly any U.S. or foreign companies that can rely on similar influence. For a U.S. company, for example, the prospect that Boeing’s $2 billion investment might be effectively confiscated by the government will be one more reason to build the next factory in a foreign country. The U.S. government won’t be able to sue to prevent the startup of production in Mexico, Canada, China, etc. For a Chinese investor, for example, contemplating investing in the U.S., imagine the impact of the story. The Chinese investor has no political influence in the U.S., a tenuous grasp of American geography and language, and no hope of getting the ear of politicians who take calls every week from Boeing and its lobbyists. Given the vicissitudes of American politics and this unpredictable aggression against investors by government, the Chinese businessman is not going to finance the U.S. project unless it can deliver a rate of return comparable to what would be expected in other countries where there is a lot of risk from capricious governments (historically these have been Third World countries led by dictators or owned by families).

The Chrysler and GM bankruptcies already showed bond investors that the black letter law may not have as much to do with how their investment works out as the sentiments of politicians and bureaucrats in Washington, D.C. (link). Now the federal government is stirring up uncertainty among those who would directly operate factories in the U.S. How to price that uncertainty is going to be a huge challenge, but the price is certainly not going to be $0.

[Loosely related: Folks have been expressing confusion as to why the Federal Reserve’s monkeying with U.S. currency (e.g., printing money to buy Treasury bonds) hasn’t had a bigger effect on business investment and jobs. I think that the answer is that every investor has to get out a checkbook and write a check. Economists and politicians tend to forget that because they’ve never had to make an investment in a business enterprise, so they don’t account for “What happens when a manager is about to write a $2 billion check for a new factory in the U.S. and reads about the Boeing mess?”]

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A friend has a choice of sending a son either to Drexel or Boston University to get a bachelor’s degree in Computer Engineering. Which would be the better choice in terms of academic quality and likely amount of learning to be acquired? How about productive social life? (Partying doesn’t count in favor of a school since the person making the choice is the parent, not the child.) If you say “School X is better”, please quantify how much more you think it would be worth to attend that school over four years, e.g., “Caltech is better than MIT for the following reasons … and I would be willing to pay $34,000 extra over four years for my kid to attend Caltech.”

[I have some of my own opinions, but will save them for a few days so as not to prejudice comments. Comments from alumni with information about the academic experience at either school would be welcome.]

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As the next election season rolls around the public doesn’t seem inspired, it seems like a good time to ask if an American politician today can be as popular as politicians in the old days. Perhaps the practice of borrowing explicitly via bonds or secretly via unfunded pension guarantees meant that older politicians have a stature that will never be matched. Let’s consider FDR and Social Security. He got credit for promising a comfortable old age to every American, a promise that was just as pleasant then as it is now. Yet the pain of taxation for Social Security was just 2 percent in the 1930s (1 percent each for employee and employee) whereas today it is over 12 percent (source). FDR was thus able to achieve far more than any present-day president. Similarly, the enormous expansion of government in the 1960s made JFK and Lyndon Johnson heroes to Big Government enthusiasts. Some adults at the time that Medicare and Medicaid were introduced could remember the days when the federal government’s total revenue was half that of U.S. Steel’s or smaller than the revenue of the railroads. Necessarily, such a government couldn’t have been doing too much for folks. The new Medicare program cost just 0.70 percent of a worker’s pay (compared to nearly 3 percent today).

Similarly at the state level, governments were delivering abundant services with employees whose total compensation included a huge component (defined benefit pension sometimes exceeding 100 percent of working salary and starting as young as 41 or 50) that would be paid for in the future. Voters and taxpayers thus literally got more than they paid for.

The U.S. lacked infrastructure in the 1930s. Politicians from the 1930s through the 1970s were able to deliver public works projects that delivered useful capital items, such as the Interstate highway system, and generated a huge number of jobs. At the same time, these could be funded with bonds that would be paid back in the future. A politician today can’t build the first highway linking two major cities or the first hydroelectric dam on a promising river; most everything that should be built in the U.S. has been built. Increased mechanization means that even if a new highway were to be built, fewer workers would be employed than in previous decades.

So if a politician seems to have less stature than FDR or Lyndon Johnson, for example, it may simply be that it is because the modern politician is forced to charge taxes on present-day voters that are paying for the very things that made FDR or Johnson great.

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In my review of iPad versus Android tablets, I couldn’t think of anything nice to say about Android tablets. The good ones cost as much or more as an iPad and seemed to lack some of the advantages that Android phones have over iPhones (the Motorola Xoom is such a bad business idea that the shareholders should really be asking why anyone at Motorola gets paid more than $15 per hour (in fact the top executives helped themselves to more than $13 million/year each in return for exposing the shareholders to ridicule with this feeble attempt at competing with Apple)). Today, however, Sonos has introduced a controller application for Android to drive their whole-house music system. The Sonos is a great system and it is nice to be able to drive it from my phone, but the phone screen is a little small for choosing from among the huge array of music that is available. This would seem to be a natural application for the $150 7-inch Android tablets that are beginning to flood the market. The official Sonos controllers are nice, but they cost $350 and can’t be used to check a fact on Google, participate in a video chat, etc.

[There is also a Sonos app for the iPad, but $500 is too much to pay for a remote control and the iPad’s one-screen-size for everyone is probably too big for this application.]

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One of life’s comforts is reading the Economist. The magazine is generally optimistic about the world’s prospects for growth and improvement. An article typically takes the following form:

1. problem is identified
2. straightforward solution is offered
3. discussion of why some countries don’t have the political will to implement the solution
4. example of one country that behaves rationally

This is comforting because it is then clear that there is a lot of low-hanging fruit. If our politicians could wean themselves from the diet of special interest money, our problems could be quickly and painlessly solved.

One example is automobile pollution. The U.S. government regulates the amount of pollution that new cars can emit, but actually encourages people to keep old cars on the road (through sales tax and property tax, in addition to the inevitable higher insurance rates of a new and more valuable car). So we get into a situation where 95 percent of the pollution comes from 5 percent of the cars. The rationalists at the Economist would point out that cars are being inspected annually. Why not hook up a meter to the tailpipe, measure the amount of pollution, and charge a tax that is proportional? This would give owners of old cars a financial incentive to buy a new Honda Accord.

Another example is automobile congestion. Two of society’s most valuable resources are the road network and everyone’s time. We let drivers waste both of these by crowding onto roads at peak times and make no effort to discourage them. The Economist would explain that a congestion fee would encouraging car-pooling and time-shifting of non-essential errands as well as boosting revenue for cash-hungry governments (enough to lift California out of bankruptcy?). Examples of the smart and successful folks in Singapore and London then close out the article.

I therefore couldn’t resist buying the April 9-15th issue of the Economist at the supermarket. The cover story promises “a special report on pensions”. I figured that I would be comforted by learning that this alarming problem has a simple solution.

The magazine gives a comprehensive overview of the problem. The most important number is the support ratio, between the number of working people and the number of retired people. In the U.S. it was 4.6 in 2010, trending to 2.6 in 2050; Australia is very similar. Japan is already living our future, with 2.6 today and trending to 1.2. Turkey’s prospects are bright today, with a 9.8 ratio, but trending towards only 3.2 in 2050; Mexico has similar numbers. The numbers give some insight into the bankruptcy of Greece: a 3.4 ratio today, trending to 1.6 in 2050 (i.e., worse than the U.S.), a young average retirement age of 61.9, and pensions that are, on average, larger than a worker’s salary. Spain doesn’t look great by the numbers either, 3.7 today and 1.5 in 2050 (paying unionized public workers, such as air traffic controllers, more than $1 million/year probably hasn’t helped them either).

Perhaps the problem will correct itself as people work until they are older? In the world’s rich countries, the official retirement age is set to rise by about 2 years by the year 2050. Life expectancy, however, is predicted to rise by 3-3.5 years. So the challenge will be getting tougher, not easier. And with public workers retiring at 41 (Boston bus driver), 50 (fire/police/prison/sheriff workers nationwide), or slightly older, plus disabled workers dropping out young, healthy private workers will have to stay on the job to age 80+ in order to bring the average up above 70, which is where it will need to be, according to the Economist.

The U.S. Social Security system has been running at a cash deficit since 2010. What’s the true cost of Social Security? The first recipient was Ida May Fuller, who paid in $24.75. She received $22,889 in benefits until her death at age 100. A couple retiring at age 66 can get a benefit of $4,692 per month for life, indexed to inflation. MetLife would charge them $1.2 million for an annuity with the same characteristics. What do folks save if left to their own devices? The average in Britain is about $44,000 (though these people know that they can count on a Social Security-like program as well and that number includes workers of all ages; the comparable U.S. figure is $58,350; the figure for workers in their 60s was less than $200,000).

Who can escape the coming pain? State and local government workers in the U.S.! Courts have held that they’re entitled to continue accruing pensions under whatever scheme prevailed at the time they were hired. Since government workers almost never quit, that means that a 22-year-old hired in New York City in the boom year of 2007, when Mayor Bloomberg and union cronies in Albany were handing out lavish pensions, will accrue those benefits until retirement at age 50 or 60. Britain is not in any better shape. Their current funding shortfall for government workers is roughly 81 percent of GDP (about $11.4 trillion if measured against the U.S. economy; whereas we have a $3 trillion shortfall at the state/local level).

Municipal bondholders will not escape the pain. When Vallejo, California went bankrupt, bondholders got 5-10 cents on the dollar. Public employee pension benefits were unchanged.

How about the example of the one successful country full of smart people? Among rich nations, the only example the magazine could find is the Netherlands. They have “a higher ratio of pension assets to GDP than any other country”, with 100% funding, basically, for the actuarially predicted costs. They retire younger than Americans (age 62.1 versus 65.5). Part of the magic is that they don’t promise unlimited inflation indexing. If their country gets poorer, the pain will be shared by the working and non-working alike. The same is true in Sweden, Germany, and Japan. But mostly the Dutch have deferred consumption. Overall, the countries that have at least some plan and hope for paying what they’ve promised are the Netherlands, Switzerland, Sweden, Australia, and Canada (this doesn’t include developing countries such as China, which has $3 trillion in cash and hasn’t made any long-term promises).

What’s missing from the issue is any hope of an easy, quick, painless, or cheap fix. The article assumes that public workers will be protected by the politicians that they paid to elect, which means private workers must shoulder a previously unimaginable burden of taxes and an extra decade chained to a desk (my article on early retirement will be read by ever-fewer people in developed nations).

[One option that the article did not mention is that U.S. state and local governments could simply fire all of their existing workers. They may not have the constitutional power to reduce benefits being accrued by workers going forward if the worker was hired in, say, 1998 or 2005, but states have the power to eliminate agencies or fire everyone. The states could then hire people as needed under new terms and conditions. (I sat next to a senior administrator from a Colorado school system. She said that the salaries they offered were so much higher than a market-clearing wage that she could replace all of her teachers within a week or two, except for some math and science positions.) Politicians who receive donations from public employee unions aren’t likely to do this, of course, but it does seem to be the way out of the fiscal trap.]

 

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The latest New Yorker magazine contains “The Grand Tour”, an article by Evan Osnos, who joins a Chinese bus tour to see Europe through the eyes of Guide Li:

“if [the bus driver gets caught working more than 12 hours/day, audited by an automated system], the fine starts at eighty-eight hundred euros, and they take away your license! That’s the way Europe is. On the surface, it appears to rely on everyone’s self-discipline, but behind it all there are strict laws.”

“We have to get used to the fact that Europeans sometimes move slowly,” he said. When shopping in China, he went on, “we’re accustomed to three of us putting our items on the counter at the same time, and then the old lady gives change to three people without making a mistake. Europeans don’t do that.” He continued, “I’m not saying that they’re stupid. If they were, they wouldn’t have developed all this technology, which requires very subtle calculations. They just deal with math in a different way. Let them do things their way, because if we’re rushing then they’ll feel rushed, and that will put them in a bad mood, and then we’ll think that they’re discriminating against us, which is not necessarily the case.”

Li made a great show of acting out a Mediterranean life style: “Wake up slowly, brush teeth, make a cup of espresso, take in the aroma.” The crowd laughed. “With a pace like that, how can their economies keep growing? It’s impossible.” He added, “In this world, only when you have diligent, hardworking people will the nation’s economy grow.”

“The European economy is in decline,” he said bluntly. “Times have changed.”

“Can a place where workers go on strike every day grow economically? Certainly not,” he said.

[Handy, a fellow tourist,] was a sanitation specialist by training, and he couldn’t help but notice Milan’s abundant graffiti and overstuffed trash bins. As Li had explained it, “The government wants to clean, but it doesn’t have enough money.” Handy tried to be polite, but he said, “If it was like this in Shanghai, old folks would be calling us all afternoon to complain.”

He pointed out the window to the highway and said that it had taken decades for Italy to build it, because of local opposition. “If this were China, it would be done in six months! And that’s the only way to keep the economy growing.”

He mentioned a Western friend who had quit his job to go backpacking and find his calling in life. “Would our parents accept that? Of course not! They’d point a finger and say, ‘You’re a waste!’ ” he said. But, in Europe, “young people are allowed to pursue what they want to pursue.”

More: Read the article.

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Friends have been asking me what the practical implications are of air traffic controllers falling asleep during late-night shifts. News reports make it seem as though the controllers’ primary job is “guiding pilots” and therefore, without a Tower controller, the two airline pilots in their state-of-the-art plane wouldn’t be able to find their way to the airport/runway.

In fact, if properly programmed, a modern airliner can more or less fly itself from runway to runway. The vast majority of airports in the U.S. don’t have control towers. Of the towered airports, most have a part-time tower, e.g., from 7 am to 11 pm at our local (very busy) Hanscom Field. If the airport is non-towered to begin with or the tower is closed, the standard procedure is for an arriving airplane to broadcast its intentions on the common traffic advisory frequency (CTAF), which is typically the same as the Tower frequency when the controllers are off-duty. A broadcast might take the form “Hanscom Traffic, Cirrus 5 miles south, entering left downwind Runway 29. Hanscom.” If an airplane were taking off, the Cirrus pilot would hear “Hanscom Traffic, Baron departing Runway 5 straight out. Hanscom” and understand that a small twin-engine plane was about to take off and fly northeast towards Maine. http://www.airnav.com/airport/KDED is an example of an airport with 213 operations per day and no tower (that is probably one of the busiest non-towered airports in the U.S. and, in fact, a tower is being put in).

If pilots can find the airport, choose a runway depending on the wind, announce their own positions, and see and avoid each other, what purpose does a Tower controller serve? At a busy airport, the controller figures out the best way to sequence and separate airplanes so that they can make maximum use of the available runways while minimizing hazards such as wake turbulence. It can be a very demanding job but, aside from helping the occasional student pilot who gets lost, has little to do with “guiding” pilots.

What if it is 3 a.m. and traffic is so light that the controller has fallen asleep? Pilots in that situation are so few and far between that they should not have any difficulty in separating themselves. What if the weather is cloudy and the airplanes are flying on instruments? This is a very common situation and it is handled by the Approach controllers issuing only one instrument approach clearance at a time. Until they hear that the cleared airplane is on the ground or has “gone missed” (elected to climb out and try again at that airport or elsewhere; a standard procedure if the weather does not meet minimum requirements or if anything unusual occurs during the approach), any other airplane that wishes to use the airport will be forced to wait (vectors or holding up in the sky; parked short of the runway on the ground).

The main challenge in the reported situations is that the pilots expected the controllers be on duty and did not expect to have to follow the established procedures for non-towered airports. At the end of a four-day trip sleeping 5-6 hours/night in Hilton Garden Inns, the last thing that an airline crew needs is to be confronted with the unexpected (i.e., not everyone can be Captain Sully!). The government has decided to address the situation by adding more personnel (at an average cost to taxpayers of at least $250,000 per year per controller, including pension and health care benefits; not clear why the “keep the first person awake” person needs to be a fully trained controller, but apparently the plan is to use the highest cost and qualified people available) but it could also have been addressed by changing the overnight procedures so that pilots would more readily revert to the non-towered procedures if unable to contact the Tower. The only existing procedure that currently applies is “loss of radio communications” in which case a pilot in instrument conditions is expected to continue the flight and land at approximately the time expected.

How would I solve the problem? Start by purchasing a treadmill for the overnight controller so that he or she could be moving at a slow walking pace rather than sitting/slumping at a desk. Maybe add some productive work that the controller could do while waiting 15-30 minutes between radio calls. Finally hire an $8/hour intern who wanted to learn about air traffic control to assist with the overnight shift (an intern would ask a lot more questions than a fully trained controller and therefore be a greater aid to staying awake). Hiring a second controller to handle a situation that arises because there is only enough work to keep 1/10th of a person busy does not seem like a wise use of taxpayer funds.

[I have some personal experience with this. For example, I landed a regional jet at the Burlington, Vermont airport after the Tower was closed as scheduled. I don’t think that our flight was late; it was simply that our schedule and the Tower’s schedule did not overlap. It felt a little strange that we were clicking the microphone 5 times (to turn on the runway and taxiway lights for 10 minutes) and making calls to “Burlington Traffic” while traveling at 230 mph with 50 passengers in the back, but we managed to land and find our way to the gate nonetheless. A corporate jet was about 3 minutes ahead of us. I don’t think anyone landed between the time that we touched down and the time that we shut off the radios.]

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Folks: I’ve completed a review of Higher Education? and would appreciate comments/corrections.

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We’re getting into roughly the 15th year of Internet digital photo sharing. Back when I was teaching one-day courses in Internet applications to broad audiences, e.g., in 1999, folks would ask me “What will cameras look like in the future?” I confidently predicted that the typical point and shoot camera would have an 802.11 transceiver and, whenever it came within range of a wireless network, would upload all of the recently captured images to an Internet photo sharing site.

It looks as though this prediction has been dead wrong, but I can’t figure out why. I still think it would be useful for the average photographer to have a camera that trickled all of the pictures up to Picasa, Flickr, or similar. Can this even be purchased? http://www.eye.fi/ seems to do most of what I envisioned, but it isn’t part of the camera itself. The latest Canon and Nikon compact digital cameras don’t offer this capability, though they can cost over $300 and you’d think the cost of a WiFi radio would be negligible.

Why would the average consumer want to monkey with USB cables, memory cards, etc. in order to get the photos up to where they can be viewed by friends and family?

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News accounts on the latest federal budget deal gave the numbers in a vacuum, e.g., “The deal cuts $38 billion from last year’s budget. It’s being called the largest domestic spending cut in U.S. history” (source). How can an individual voter make sense of quantities that are ordinarily written in scientific notation? I think the easiest way is to divide everything by 100,000,000 (10^8).

Let’s start with federal spending. The FY 2011 federal budget is approximately $3.82 trillion (3.82×10^12). Of that, approximately $2.17 trillion will be paid for by taxes collected and the remaining $1.65 trillion will be borrowed from our grandchildren. If we divide everything by 100 million, the numbers begin to make more sense.

We have a family that is spending $38,200 per year. The family’s income is $21,700 per year. The family adds $16,500 in credit card debt every year in order to pay its bills. After a long and difficult debate among family members, keeping in mind that it was not going to be possible to borrow $16,500 every year forever, the parents and children agreed that a $380/year premium cable subscription could be terminated. So now the family will have to borrow only $16,120 per year.

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