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Take one fiscal cliff with water an hour before bedtime; you’ll feel better in the morning

Written by George Schussel on 5th December 2012

The media seems obsessed with the coming fiscal cliff. Even TV shows are running count down clocks showing how short the time is until ‘we fall off the cliff’. As if that’s a bad thing!

The fiscal cliff is about the effect of a number of laws that (if unchanged) will result in tax increases, spending cuts, and a reduction of around 50% in the US budget deficit beginning in 2013. The Congressional Budget Office (CBO) estimates the sudden reduction in borrowed spending will likely lead to a recession in early 2013 with a strong recovery after 2013.

This effect, which is sometimes called the expiration of the Bush tax cuts, is largely the result of the Budget Control Act of 2011, a bipartisan compromise between Republicans and Democrats. It was intended as a sort of sword of Damocles, hanging over the public body to force Congress to do something to solve the USA’s binge public spending habit.

The fiscal cliff is bemoaned by those interest groups who are feeding at the public trough. This would include all manner of Americans (47%, as Mr. Romney so kindly pointed out). The military, seniors, welfare, education, and many others would be affected.

But….if you’ve had the opportunity to interact with Federal government programs you almost certainly have encountered programs which have enormous bloat and waste associated with them. I’ve seen government programs that perform ‘negative work’ – we would be better off if they were eliminated.

Special interest groups bemoan that falling off the cliff would drastically reduce the military capability of the United States. What isn’t said is that the USA spends 43% of the entire world’s military spending. China’s figure is 7%, with both Russia and the UK around 3%. Is there any waste here?

If you believe that it’s OK to spend more than you earn, year after year, then you probably should hope that politicians come to some agreement on avoiding the fiscal cliff. However if you think that government should (more or less) balance its books, then I suggest that you might look at the looming cliff as a GOOD thing.

The fiscal cliff debate is about going back to the higher tax rates that were in effect during the Clinton era. Those times, economically speaking, were pretty awesome. That era benefitted from the emergence of the Internet. But if and when we go over the cliff, I believe that the US economy will benefit from something even bigger.

First of all the US dollar will get much stronger as investors around the world realize that the US is going to be running a much smaller budget deficit. A stronger dollar will result in lower prices for imported goods, reducing or eliminating inflation. The fundamental economic force driving the Clinton era was the emergence of Federal surpluses instead of deficits.

Secondly, as the Paris-based International Energy Agency (IEA) has predicted, it appears that the US will emerge as the world’s number 1 energy producer over the next ten years. The IEA has predicted that the fracking revolution in this country will cause the US to surpass Russia’s gas output and Saudi Arabia’s oil output by the end of the decade. The elimination of the expenditures that now go overseas for imported oil and oil products will almost totally eliminate the trade deficit that the US currently runs.

To summarize, deficit spending reduction and the trade deficit moving from a minus to even or plus will cause the dollar to strengthen enormously, enriching all Americans. The energy revolution that is coming will create hundreds of thousands of new jobs for Americans. The removal of the huge tax that Americans pay now for foreign energy will result in that money being spent in the USA. This will create hundreds of thousands of new jobs. The strong dollar will pull in investment from all over the world, lowering interest rates naturally, rather than artificially as through programs like the Fed’s QE3. All of this will create a new economic boom from 2015 on.

Today the stock and economic markets are sluggish. The sooner we eliminate the uncertainty of what’s coming, the sooner we can make the adjustment to a less bloated government and get on with the next boom. We just have to suck it in and go on a diet for a while. The rest of the cards will fall into place through the engine of free enterprise capitalism. Short term pain, huge long term gain. Fiscal cliff, I love you.

Another day, Another Summit, Another Euro?

Written by George Schussel on 1st July 2012

Last Friday the markets and euro rallied strongly, as hope about the news from the twentieth European summit on the financial crisis was viewed positively. Spanish bonds and European stock markets rallied while the Dow had an almost 300 point gain.

Less noticed, but more telling in my opinion was a story in Saturday’s Wall Street Journal about the 2008 acquisition of Countrywide Financial by Bank of America. According to the WSJ, the deal has cost BofA more than $40 billion in real estate losses, legal expenses and settlements with various government authorities. Countrywide was the largest mortgage lender in the US and was especially exposed in the area of subprime and adjustable rate mortgages. Quoting from the article “It is the worst deal in the history of American finance said Tony Plath, a banking and finance professor at the University of North Carolina…”

In 2008 as BofA was closing the Countrywide deal, its stock was trading in the high 20’s and low 30’s. It’s now around 8.

If you took Countrywide or BofA now, and pretended it was a sovereign nation, the country it most resembles would be ….. Spain. Half of Spain’s entire GNP over the decade of the 2000’s was real estate construction based.

Interest rates being paid by the Italian and Spanish governments in the issuance of new debt are 6-7%. Southern European governments in general are trying to rein in their borrowing costs by raising taxes and lowering spending in a move to more austerity. As a result the countries who are in the most trouble are seeing their economies shrink and in this drive to more austerity, their total government debt as a share of gross domestic product continues to increase.

As the nice, but generally vague, words from last week’s 20th summit are digested it would pay to think about these issues: (thanks to Simon Dixon, WSJ):

  1. Given that France’s new president Hollande has recently decreased the retirement age for workers to 60, how likely is it that he will reverse direction and raise the retirement age for French workers to 67?
  2. Coming out of the summit will Italy’s prime minister Monti be able to change Italian law so that companies who are seeing reduced business can lay off workers without a priori obtaining the approval of a judge?
  3. Will Spain, whose real estate boom and bust as a share of GNP makes the American real estate bust seem small and manageable, allow bankrupt banks to shutter bank branches?

It is true that most of Europe has many more bureaucratic and sclerotic rules making it far more difficult to start and run businesses than in the US. This past week CNBC ran a special on what this financial crisis means to the person on the street in Greece. One story was about a lady who was trying to open a bookstore with an attached coffee shop. She recounted that for over 18 months she had been working with 20+ government agencies to obtain permits and had not yet gotten all the permits she needed to open a small storefront. To a very significant extent European regulatory rules favor the establishment, making new entrants jump a high hurdle. The result in the south of Europe is extremely high unemployment among the young ranging from 20% to 50%.

Too much borrowing, too much debt, and too much under water real estate for sale are characteristics of societies with inflexible labor markets and unaffordable welfare systems. THIS is the problem that has driven a wedge between the productivity of Northern Europe vs. Southern Europe. And without the political will to change and improve the productivity of the South we’ll still be talking about this at the 30th and 40th summits. Watching European politicians I’m reminded of the Mad Magazine board game we used to play with our kids. Mad’s ultimate ‘trump’ card was the “What, me Worry? You Worry!” card. With that card you could reverse any attacker’s approach right back onto the person attempting the move. Too many European politicians seem focused on convincing their foreign rivals to change, rather than attacking their internal inefficiencies.

Quoting, again, from Simon Nixon who stated it beautifully:

The alternatives are a breakup of the single currency or turning it into a giant version of Italy—a difficult-to-govern transfer union with political and financial instability hard-wired into its constitution. Both of those ultimately lead to the risk of financial catastrophe.

And us? We are marching in the same direction. Even in my beloved New Hampshire, whose state motto is “Live Free or Die”, the march toward more bureaucratic rules and regulations seems inexorable. Beware.

Why the Euro can’t survive without radical change

Written by George Schussel on 31st May 2012

Austan Goolsbee, professor of economics at the University of Chicago and former chairman of President Obama’s Council of Economic Advisers from 2010 to 2011 has written a short and brilliant analysis of the European monetary crisis. It’s in the May 30, 2012 Wall Street Journal and entitled “A Fiscal Union Won’t Fix the Euro Crisis”. His analysis is so excellent and profound that I can’t improve on it and for those of you who don’t subscribe to the WSJ, you can find its text in the blog below.

Goolsbee concludes that the ONLY solutions to Europe’s crisis are: 1) allowing easy and complete mobility between European countries for workers, 2) allowing strong inflation in German and other Northern Europe economies, or 3) creating strong and ongoing subsidies from countries like Germany, France, Belgium, Finland and the Netherlands to countries like Portugal, Italy, Greece and Spain.

As you read Goolsbee’s insightful commentary, consider the following:

  1. Mobility is an unlikely candidate for any improvement in the next few years. Differences in language, culture, eating habits, greater difficulty in selling homes in a down market and racial bigotry means that truly open borders will take a long time – if ever – to happen.
  2. Germany’s agreeing to high wage inflation, as Goolsbee suggests is unlikely in the extreme. It’s not a political possibility until anyone who was born before 1950 has passed. High inflation in Germany led directly to the ascendancy of Hitler, who promised its cure. More than any other causal factor for WW II, this inflation permitted a lunatic to take over the German government with the majority of populace supporting him. In the resulting world war, over 25 million perished. Of that number an estimated 10 million were Germans.
  3. Large and ongoing subsidies from the northern economies to the south? That’s nowhere envisioned in the European constitution or principles. Goolsbee clearly indicates that it’s not going to happen either.

Read on to understand better Goolsbee’s remarkable insight that the American fiscal union’s most important principle is one of subsidies from the rich states to the poorer ones – without asking permission from those richer states. Then you’ll understand that the Euro’s problem is really pretty much unsolvable. And for how long and how far can this bucket be kicked down the road? And what does it mean to us? Europe is a far larger and more important trading partner to the US than China (80% larger total 2 way trade). More to come later…..

Wall Street Journal, May 30, 2012
 A FiscalUnionWon’t Fix the Euro Crisis
The only practical choices are more geographic mobility, inflation, or subsidies.
By AUSTAN GOOLSBEE

Recently Kurt Bills, a candidate for the U.S. Senate and a devotee of Ron Paul, introduced a bill to consider an alternative currency for Minnesota and its citizens. When I heard this idea I thought what every mainstream economist probably thought: Wow is that nuts.

Yet many observers (and online betting markets suggest a majority) believe that Greece must return to its own currency. The economies of Greece and of Minnesota are about the same size (2% of U.S.gross domestic product), so why is an independent currency viable for one and quackery for the other?

One key economic difference is the existence of a fiscal union in the United States. Increasingly, euro-zone hardliners have called for putting in a disciplined, unified fiscal arrangement similar to the one we have in the U.S. Unfortunately, their vision of fiscal union has badly missed the essence of the U.S. experience and would not fix the euro crisis.

At root, the euro-zone problem remains the locking together of very different economies into a monetary union without a way to adjust. Since the start of the union in 1999, productivity in the North, especially in Germany, has grown rapidly while wages have not. In the South, productivity has lagged. As a result, the unit labor costs in Germany have fallen about 25% since the euro’s creation as compared to the Southern countries and France.

Normally, exchange-rate adjustments would reduce this gap. The slower growing, poorer country would become more competitive as its manufactured goods and its tourism became cheaper. Real incomes would take a hit initially, but the economies would have a path to growth. Inside a monetary union, however, there are no exchange rates to change.

That alone doesn’t need to doom the monetary union. But without an exchange-rate safety valve you need an alternate way to rebalance economies. Moving, inflating, struggling, or subsidizing are your only choices—and none of them is easy.

If workers move freely to high-growth areas or if the central bank is willing to loosen monetary policy to get the high-growth economies to start inflating, that can replace the exchange rate as the safety valve. Inflation in the high-growth economies will change the relative real wages between the counties the same way a devaluation can. Labor mobility helps the U.S.in that sense. In Europe, though, mobility between countries with different languages is low and German tolerance for inflation seems even lower. That leaves suffering and subsidies.

Southern Europe can struggle through the problem—grinding down wages through high unemployment and structural labor-market reforms to make a country such as Greece more competitive internationally. History suggests this will not be an easy sell. Wage cuts usually come only after tremendously extended bouts of high unemployment. Structural reforms can take years to actually raise productivity growth rates.

Or Northern Europe could decide, for the sake of a united Europe, that it is willing to permanently subsidize euro-zone countries with low productivity growth. That could be through explicit subsidies or through bailouts and broad-based guarantees. But in the North, subsidies remain anathema. The Germans are quite right that the euro zone was absolutely not created to enable permanent subsidies, and their opposition is easy to understand.

Thus, lacking the normal safety valves to keep dangerous imbalances from destroying the monetary union, the euro hardliners are left with the idea of fiscal union. These hawks, however, misunderstand a fundamental strength of the U.S.fiscal union. They seek a union to impose budgetary discipline and structural reforms on laggard countries while the U.S.fiscal union serves mainly as an engine of subsidy.

Last year, the Economist compiled census data from 1990 to 2009 for all 50 U.S.states on the amount of federal spending in each state minus the amount the state’s residents pay in federal taxes. Over 20 years, states like Minnesota and Delaware annually paid in about 10% more of their state GDP than they got back. On the other side, for the last 20 years New Mexico, Mississippi and West Virginia have received annual subsidies of more than 12% of state GDP. While not a perfect measure of subsidy, it conveys the basic point well. These are big. Greece’s entire 2011 deficit, for example, was 9.1% of GDP.

The U.S.fiscal union has worked, in no small part, by enabling subsidies to the Mississippis without requiring the approval of the Minnesotas. It creates an important form of insurance. When Texans suffered from the collapse of the oil market in the 1980s, they could rely on the fiscal union to help them. When Texas boomed with rising oil prices in the 2000s, it contributed to the union to help harder hit regions.

Giving Northern Europe a veto over Southern Europe’s budgets will not hold a monetary union together. The euro zone will continue to need the weaker countries to stomach decades of high unemployment to grind down wages.

Without some significant inflation in the North or mobility from the South, holding the European monetary union together will cost Northern Europeans a great deal of money. In other words, if a fiscal union is to save the euro zone, it would need to facilitate subsidies from North to South, not eliminate them. As far as the likelihood of that, I wouldn’t be willing to bet a dollar—even if it were backed by the state of Minnesota itself.

RACK ONE UP FOR THE LIBERAL NOBEL LAUREATE

Written by George Schussel on 20th May 2012

On Sunday I watched part of Fareed Zakaria’s GPS, arguably the best of the Sunday talk shows. I like GPS because of the quality of Zakaria’s guests, which combined with his penetrating questions makes the show an educational treat. One of the guests Sunday was Paul Krugman, formerly an economics professor at MIT, currently at Princeton, and a Nobel laureate.  Krugman, well known as a liberal, was pitching the idea advanced by Francois Hollande, France’s new president, who was elected by preaching that austerity  is no way for Europe (or the United States, for that matter) to climb out of the severe recession that has been running rampant through the advanced economies since 2008.

Krugman had a couple of hard to deny points. In particular, he refused to compare the United States’ debt situation with that of Greece, Italy, Spain or Portugal, the southern tier of the European countries that seem to be in trouble with overpriced labor, bloated civil servant cores, and too much debt. His point, certainly valid, was that the United States borrows in its own currency.  I certainly agree that our country, with a combined fiscal and monetary policy by a single federal government, is in a far stronger position to deal with economic challenges than any of the European governments who have joined the common Euro currency, yet still maintain widely different fiscal, tax, language, and economic bases.  Of course that’s the main reason why Great Britain, whose major trading partner is the European Union, has refrained from adopting the Euro currency by keeping its own currency – Sterling.

The idea of the Euro, a single currency used by many different sovereign entities, is a grand experiment. When it was initiated a little over a decade ago, it truly was a first time experiment in the modern era of paper currencies. The history of how well it’s going to turn out remains to be written.

Another interesting point Krugman made was that our very tepid recovery in the USA, which has been monthly adding a small, inadequate number of jobs for the size of our population, is to some extent the result of a sharp reduction in government jobs across the country. State and local governments have seen their tax revenues sharply cut with the real estate meltdown and have responded by cutting their employment totals. Local governments don’t have the flexibility of the federal government which creates money by expanding its balance sheet. Local and state governments have to raise any shortfalls through taxes or by borrowing via bond issuance. Krugman’s point is that the totality of the government impact on the American employment has been one of austerity and that we don’t need more of this as we’re trying to re-inflate our economy.

Krugman is clearly brilliant, and made a fine argument against too much fiscal austerity for a recovery in Europe – or in theUnited States.

Does anyone in government care about lowering costs?

Written by George Schussel on 7th May 2012

You may be aware that the Federal government is the one institution in America that doesn’t have to balance its budget. In a carefully choreographed dance between the US Treasury and the Federal Reserve System money is created out of thin air by the Federal government and appears to be (so far, at least as long as the Chinese are willing to continue to buy US Treasury bonds) limitless.

The skyrocketing expenditures of our federal government have become a major focus of this presidential season. The GOP is promising sharp cuts in all kinds of programs (something that preceding Republican administrations, such as those of George W. Bush or Ronald Reagan, promised but never delivered). The Democrats are ready to continue spending on ‘productive’ programs. But, surely both parties would agree that Federal spending on wasteful programs should be eliminated, right? Read on……

A recent government report prepared by the GAO (General Accounting Office now renamed the Government Accountability Office and recognized as the non-partisan investigative arm of Congress) shows how several $100’s of millions of dollars a year in the Federal budget could be saved if only the Federal Bureau of Prisons (BOP) implemented the suggestions and programs identified in the report. For reference sake, it should be noted that the BOP budget (just shy of $20 billion/year) consumes the lion’s share of budget dollars at the Department of Justice.

This report is:

GAO REPORT REVEALS MULTIPLE WAYS TO END THE WASTE OF MILLIONS ON UNNECESSARY OVER-INCARCERATION.

By authors:
  • Thomas W. Hiller, II, Federal Public Defender, Western District ofWashington
  • Michael Nachmanoff, Federal Public Defender, Eastern District of Virginia
  • Co-Chairs, Legislative Expert Panel
And
  • Stephen R. Sady, Chief Deputy Federal Public Defender, District of Oregon

The Government Accountability Office (GAO) has performed an important service in its study on the Bureau of Prisons’ ability to reduce incarceration costs. The report can be used as a starting point for identifying ways to reduce prison over-crowding, reduce the risk of future recidivism, and save millions of taxpayer dollars every year. Identified in this report are several programs which the BOP either underutilizes or ignores altogether. The report stresses that implementing its included suggestions would reduce BOTH the costs of over-incarceration AND future recidivism.

As an example, the GAO identified three statutory programs that, if fully implemented, would save taxpayer dollars that are now being wasted on unnecessary incarceration. Quoting:

  • The BOP underutilizes the residential drug abuse program (RDAP) incentive for nonviolent offenders. If inmates had received the full 12-month reduction from 2009 to 2011, the BOP would have saved up to $144 million. Much more would be saved if all statutorily eligible prisoners were allowed to participate.
  • The BOP underutilizes available community corrections so that inmates serve an average of only 4 months of the available 12 months authorized by the Second Chance Act. Just by increasing home confinement by three months, the BOP could save up to $111.4 million each year.
  • The BOP underutilizes available sentence modification authority for “extraordinary and compelling reasons,” depriving sentencing judges of the opportunity to reduce over-incarceration of deserving prisoners whose continued imprisonment involves some of the highest prison costs.

These recommendations are explained in far more detail in the report itself. It was addressed to Senator Patrick J. Leahy, Chairman of the Senate’s Judiciary Committee, and Bobby Scott, Ranking Member of the House Subcommittee on Crime, Terrorism, and Homeland Security.

For those of us who aren’t involved in government, it would seem obvious that intelligently researched and presented recommendations like these will likely be implemented in a fairly short time. But, in fact, it’s unlikely that these recommendations will be implemented in the near future. There is a very strong and entrenched lobby of thousands of workers in the Federal system of justice who see such ‘efficiency’ suggestions as threatening to their jobs. For example, most employees of the Federal Bureau of Prisons (BOP) are unionized, as are the employees of California’s and other prison systems. And these unions typically lobby for stricter and longer sentences for convicts. As the number of man-months of incarceration increases, so does the number of jobs for corrections officers and the associated costs to be paid by taxpayers.

There is only slight pressure for reducing the expenditures of the Federal government, as there appears to be almost no limit to the amount of money the government can print – as long as foreigners, like the Chinese, are willing to recycle excess dollars into purchases of US Treasury bonds. Yes, some politicians support the abstract idea of reducing government spending, but history has shown that regardless of which party occupies the White House, spending continues to cycle upward.

Greece is like the canary in the coal mine. What’s happening there can propagate. If you think we’re so much smarter than the Europeans who appear to be going socialist, then what is the explanation for why the Euro has only weakened so very slightly against the Dollar in the last year?

American states, as opposed to the Federal Government, can’t expand their spending by printing money. Some, like Michigan, are trying and achieving success with new programs to reduce the costs of incarceration. But California is an interesting exception as this state is now spending more money on prisons than on education – as Fareed Zakaria and Thomas Friedman recently pointed out on CNN’s Sunday Global Public Square program. And accordingly, it is seeing a net outmigration of people, especially from California’s middle class. For more on this topic, see Joel Kotkin: The Great California Exodus.

Where American criminal justice went wrong

Written by George Schussel on 21st April 2012

The Boston Globe, February 26, 2012

William Stuntz, a Harvard Law School professor, who recently passed away was highly respected in the field of criminal justice. Interestingly, he was a political conservative. It’s usually liberals who are more concerned about the prison population and finding better ways to deal with criminal issues. The Boston Globe, this past February published a review of professor Stuntz’ last major work, a book entitled The Collapse of American Criminal Justice.

Clearly the American justice system has fallen off the tracks with the result that the United States now incarcerates 1/4 of all prisoners in the world. We are imprisoning a higher percent of our population than Stalin did of Russians in the 20th century.

If you are interested in Stuntz’ ideas, you can pick up his book at Amazon or a local bookstore. You can read the Globe’s account by clicking on the Boston Globe link above. Or just read on below, where I’ve pulled a few choice quotes from the article.

 

The book was written in a hurry. It had to be, because William Stuntz was dying, and the story he wanted to tell was long and complicated. It would be the Harvard Law School professor’s final major work, a sweeping indictment of the system he had been studying for 25 years.

Stuntz was 49 when he found out he had stage four colon cancer. For the remaining three years of his life, he worked on the book whenever he could: in his office at Harvard; at his family’s home in Belmont; even at the Massachusetts General Hospital Cancer Center, where he would sit with his laptop in the infusion chair and type. Stuntz passed up pain medication so he could think more clearly. In the final days, after he entered hospice care, he had his assistant mail him a draft of his manuscript so he could go over any last minute changes.

What drove Stuntz to finish the book — even as he continued teaching classes and trying to spend as much time as he could with his wife and three children — was a belief that something had gone fundamentally awry in America. Stuntz, an evangelical Christian and an avowed conservative, wanted people to grasp the profundity of the crisis he had observed — how, over the past 50 years, our criminal justice system had been transformed into an unfair, amoral bureaucracy–one that had given up on the very idea of justice.

IN 2010, THE MOST recent year for which the Justice Department has figures available, there were an estimated 2.3 million adults in jail or prison in the United States. That means nearly 1 in 100 American adults are behind bars, an incarceration rate more than five times higher than it was 40 years ago. The numbers for African-Americans are even more grave: According to the Sentencing Project, a Washington think tank, a third of all black males born today will serve time at some point in their lives.

Concern about the prison population is usually a liberal issue, but Stuntz, who favored small government, opposed abortion, and made no secret of voting Republican, was driven in his academic work by a sense of concern for the disenfranchised and the poor that would have struck many members of his party as unforgivably left-wing. It is precisely because Stuntz was such a peculiar political animal that his book – which has been praised in outlets as politically diverse as the Nation and the National Review, and has been endorsed by the likes of Richard Posner and former Supreme Court Justice John Paul Stevens – is now being described by legal scholars as a work of potentially huge influence.

Under the current system, justice is essentially administered by prosecutors, who have every incentive to threaten defendants with the harshest possible sentence–and indirectly driven by politicians, who court the favor of voters by passing more and tougher laws. The practical result, Stuntz writes, is that the criminal justice system is now anything but local, and mostly indifferent to the people whose lives are most directly affected by it. Poor minorities who live in the urban neighborhoods with the most crime are living under laws passed to please middle-class voters who live elsewhere, and processed by a system built to force a guilty plea rather than determine whether they actually deserve to go to prison.

Stuntz wanted to show that there was nothing inevitable about our present circumstances–that what has gone wrong in our criminal justice system is the result of decisions and miscalculations that can be identified and understood. That doesn’t mean they can be easily annulled, of course, but it does provide hope that change is possible.

OK, IT’S 2012. SO WHAT’S THE NEXT BIG THING? BIG DATA

Written by George Schussel on 17th April 2012

One of the most famous lines in movie history is when Dustin Hoffman in The Graduate is told the secret to his future success, “plastics”, which was a hot growth area in 1967. In my career I’ve been fortunate enough to witness a few ‘next big things’ and be in a place and time when I could act on them.

In 1971 I was asked to teach a course on data base management. At that time it was a very new subject with a worldwide installation base of no more than a few hundred sites, mostly IBM’s IMS. I thought it would become big and the topic of data base management systems ultimately led to the formation of Digital Consulting, Inc. and Data Base World.

When the IBM PC came out in 1981, I had a similar thought that this was going to really change the focus of computing away from the then popular mainframe and into distributed computing. At DCI we started a trade show called Downsizing Expo, which was very popular for a few years.

And in 1994, as a beta tester of Windows 95, I thought that this product would become explosive for Microsoft and lead to a kind of world domination. I wrote about this in my Client Server Today Magazine column, and here are a few excerpts from that article:

In its 1994 wrap-up, “The Year in Review,” PC Week listed Windows 95 as one of the six “biggest letdowns of the year.” I don’t agree…Once it arrives, Windows 95 will sweep the industry like a tornado, unlike anything the industry has seen before…

Win 95… is going to create the loudest sucking sound you’ve ever heard for Microsoft Office. At a yield to Microsoft of perhaps $100 per copy and installing on, say, two thirds of Win 95 sites, Office should bring another $1.5 billion per year or so into Microsoft’s coffers.

Microsoft’s stock price should appreciate from the strong cash flow… That will mean the company’s capitalization could escalate to the point where it will be in a position to… challenge IBM for…the highest market capitalization.

Anyone who purchased MSFT at the time this article appeared would have seen a 400% appreciation as the stock split four times from 1995 to 2000.

I have no doubt that we are now seeing the beginning of tremendous growth for the field known as “big data”. Big data has become a useful technology as result of progress made in many fields:

  • Cloud computing with enormous drops in the cost of computing and data storage.
  • Widely available real time computing with cloud farms from companies like Amazon, Microsoft, Rackspace, GoDaddy, IBM, etc.
  • Enhanced capabilities in natural language processing and artificial intelligence (AI).
  • The combination of DBMS and data mining capabilities with faster, cheaper processing as discussed above.
  • Growth of data being created and made accessible over the Internet.

The basic idea behind  big data is to mine the world wide web for data that is occurring in real time and that, based on past experience, has been shown to correlate positively with variables that are valuable to predict.  The benefit to most users comes from the closely related field which is usually referred to as ‘analytics’. This is the science of how to interpret and use the Internet’s enormous sources of data to help one make those decisions which will prove profitable. And if you can use super cheap computing to do this, you don’t need to improve very much over informal ‘guessing’ to offer tremendous advantages to decision makers.

We are going to witness many new software companies building and marketing platforms that are to be offered to users as a low cost way to jump into the field. Examples include: WiseWindow, Topsy Labs, Relevant Data, Recorded Future, Crimson Hexagon, and SENSENews. And I have no doubt that existing software players such as SAS, SAP, Oracle, IBM, etc. will also be players.

Big Data is even to the point that it has its own conference and trade show industry with specialized events such as:

  • Big Data Conference
  • GigaOM’s Structure:Data
  • O’Reilly Strata Conference and Hadoop World
  • World Conference 2012: Big Data Tipping Point
  • Big Data Innovation

Big Data and analytics. The new plastics!

BIG DATA AND PREDICTIVE ANALYTICS

Written by George Schussel on 12th March 2012

My current research interests include ‘big data’ and ‘predictive analytics’ You may have noticed articles or coverage of the topic as it’s made it into the popular media. Business Week, Time, the New York Times and others are covering what’s happening with big data. From time to time I’ll post updates here on what we’re doing and finding out about building a new software company to attack the problem of mining ‘big data’.

A WAY TO REDUCE FEDERAL GOVERNMENT SPENDING AND IMPROVE AMERICAN SOCIETY. WHY ARE NO POLITICIANS DISCUSSING THIS?

Written by George Schussel on 5th March 2012

You may be aware that the Federal government is the one institution in America that doesn’t have to balance its budget. In a carefully choreographed dance between the US Treasury and the Federal Reserve System money is created out of thin air by the federal government and appears to be (so far, at least as long as the Chinese are willing to continue to buy US Treasury bonds) limitless. With low interest rates and no other places to put so many billions of $US, foreign governments like the Chinese will buy American treasury bonds, in effect lending us money at rates as low as 2%.

But as the presidential election looms over our 2012 news, we are becoming more aware that wild spending without anything more to pay for it than the hot air coming out of Washington DC can be very dangerous. If you doubt that we can look to Greece as a case study into what happens when a government and society continue to spend beyond their means. Yes, it’s not impossible, and in fact likely, that America can follow Greece into default and an ugly capsize from power along with a shocking drop in our standard of living if we do not fix government spending beyond its means.

From the actions of both Republican and Democratic administrations over the last 40 years, it’s clear that it doesn’t matter which party is in charge, it’s considered good politics to continue to increase spending on rewarding one’s political allies. With the largest prison population and highest incarceration rate of any country in the world one could wonder as to why we don’t look at how to reduce the spending on the world’s most richly funded criminal justice system – America’s. At the state level, where governments must balance their budgets, many initiatives are being explored on how to reduce the monies being spent on state corrections budgets. In some cases, like California, the state is under court orders to reduce overcrowding in prisons. In other cases, like Michigan, innovative approaches to parole with supervision are being used to reduce inmate incarceration totals and the states’ expenditures on prison related costs. Still other jurisdictions are experimenting with the idea of releasing elderly offenders as a way of mending families while relieving the state of the medical costs of maintaining an elderly population which has a very low risk of criminal recidivism.

The exception to this drive to lower costs for taxpayers is the US Department of Justice and its ever growing Federal Bureau of Prisons. The US Congress continues to pass laws criminalizing all kinds of behavior. And many of these new laws have eliminated the centuries old concept of mens rea, the need to be aware that one is committing a crime. All administrations continue to increase spending on the Federal Prison System who’s total population has grown to well over 200,000, a ten-fold increase over the last 40-50 years, while the overall American population has, at most, doubled.

In a Wall Street Journal story published on September 27, 2011  http://online.wsj.com/article/SB10001424053111904060604576570801651620000.html , this alarming breakdown in the Federal system of laws is explained further. Quoting from that article

“For centuries, a bedrock principle of criminal law has held that people must know they are doing something wrong before they can be found guilty. The concept is known as mens rea, Latin for a “guilty mind.” This legal protection is now being eroded as the U.S. federal criminal code dramatically swells. In recent decades, Congress has repeatedly crafted laws that weaken or disregard the notion of criminal intent. Today not only are there thousands more criminal laws than before, but it is easier to fall afoul of them.”

One result is that both administrations of Democrats and Republicans over the last 40 years have continued to increase the funding of the Federal BOP where it now hogs the major share of the Department of Justice’s budget. The politics of this is simple. “We’re being hard on crime”.

Our upcoming and new site (www.prison-justice.com) will argue that the increased funding for prison has exactly the opposite effect of what some politicians would have us believe. We believe that imprisoning an ever increasing number of our citizens is increasing the level of crime in America, not lessening it.  The US Department of Justice doesn’t argue this fact as their statistics indicate that recidivism rates are well over 70%.

Stay tuned for more discussion…..

WHY ISN’T WALL STREET IN JAIL?

Written by George Schussel on 5th March 2012

The title of this blog is a statement that has been debated in many leading American publications since the financial panic and market crash of 2008/2009. It’s also the title of a well written article by Matt Taibbi in March 3, 2011 issue of Rolling Stone  http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?print=true . The subtitle of Taibbi’s article says it all: “Financial crooks brought down the world’s economy — but the feds are doing more to protect them than to prosecute them.”

Taibbi’s writing is representative of the way many feel and raises the unanswered question of how is it possible that events which caused so much pain and destruction for so many people have gone unpunished by the criminal justice system?

Here is a little more from Taibbi’s article:

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world’s wealth —and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What’s more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even “one dollar” just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick “The Gorilla” Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

Yes, what Taibbi says is easy to sympathize with, but it isn’t the whole story. The bigger issue is about fundamental rules of capitalism. And what is defined as criminal conduct. We may call what the banks did as criminal in the vernacular, but it isn’t defined as criminal in the law. In our system of creative and destructive capitalism, too much government regulation can and will choke off the risky behaviors that create ultimate value and that define what entrepreneurs do. And, like scientific invention, it’s very hard to define what the line between innovative creation and destructive recklessness is. While it’s hard to define that line in a commercial environment, it’s even more important that such a line be cleanly defined if we want to apply it to our legal system, where (hopefully) more clarity and certainty  should be required.

I’ve always believed that the financial models designed by Wall Street’s “rocket scientists” and used by investment banks, while better than intuition in many cases, could fail at points of inflection (in a mathematical sense). The definition of this is that such a point can’t be modeled by simple linear, quadratic or other mathematically defined algorithms. And panics, by definition are always points of inflection. (The ‘Big Bang” that originated the Universe, according to modern physics, can be modeled back to within a very short time of the event itself. But what happened at the moment of the Bang itself? We don’t have those mathematical tools – yet.

The economics and business literature published since the great recession of 2008/2009 has made great notice of the fact that unusual events over many years appear much more frequently than a statistically normal distribution would predict. This phenomenon is sometimes called a fat tail (again referring to a normal distribution), a perfect storm or a black swan. All of these refer to the unexpected event relative to what some mathematical model would predict (This has also been shown to be  true for ocean waves, which should be modeled by the mathematics of fluid dynamics.) So at least we are all warned that there is potential disaster waiting if we don’t understand the risk involved in this increased probability of very unusual, and potentially destructive events.

In the creation of collateralized debt obligations (CDO’s), Wall Street told us that taking junk (low rated, high risk mortgages) and slicing and dicing them into tiny pieces and then randomly distributing them would make this junk into delicious cheesecake. But that model assumed that there would be no causal relationship between defaults, where in the real world, it’s clear that there are events which could cause a real relationship between one mortgage going bad and others in the neighborhood also going bad. And it’s clear to the beginning student in economics that exogenous events like a worldwide financial panic could cause whole bunches of mortgages to correlate in their defaults.

But here’s the BUT. By 2008, Congress hadn’t passed laws defining those bankers’ risky behaviors as criminal. In our system of capitalism, there needs to be some responsibility for one’s own behavior – caveat emptor that would apply to the buyers of those (as it proved out to be) risky CDO’s! And that is why I pushed for my children to get MBA’s – to be able to be aware of these kinds of sophisticated scams (as it turned out) and avoid them. It’s not perfect, but our economic system is still the best we’ve figured out so far. Certainly it has proven a lot better than the central government planning systems that were discredited at the end of the 20th Century. And these ‘black swan’ busts are a price we pay for our superior economic performance, as we’ve not figured out how to tune them out of the system. So Taibbi’s writing certainly appeals to our emotions, but it doesn’t show an understanding of how our economic engine runs. There’s no substitute for truly understanding what you’re doing or buying.