Israeli startups

The Economist discusses the disproportionate impact of Israeli startups in the tech industry. Israelis are especially prominent in computer security, often due to their training in the military. One of the public companies that almost acquired my last startup (since merged/acquired by Juniper) had an extremely bright Israeli CTO who had come aboard from a previous acquisition. Like many other Israeli technologists, he was an alumnus of the IDF (Israel Defense Forces) signal corps training program, which takes in the brightest recruits for intensive IT training. Membership in that unit is sort of equivalent to having a Caltech or MIT degree. At least, the screening process is pretty tough. Of course, there might be other reasons for Israeli success in high tech :-)

Red Herring: Talpiot is a special army training program that puts the best high school graduates through a rigorous curriculum of computer science, physics, and math, then places them in key assignments in, say, intelligence units.

...The selection process for Israel's army-trained technology elite starts when teenagers apply to programs, usually in their last two years of high school. Only volunteers are eligible to be chosen for the army's training programs. The most selective program, Talpiot, accepts only 30 applicants, or 1 in 10, a year. Officers say the army doesn't look for fuzzy traits like creativity and leadership; it focuses on measurable qualities. Extremely high aptitude in math and science, along with success in rigorous exams, are the key qualifications.

REBOOT CAMP

Talpiot's M.O. is total immersion, whether the subject is software coding or the Arabic language. The programming course is just six months long, but classes run from 8 a.m. to 10 p.m., five and a half days a week. Although many soldiers say that the program's immersion approach is an effective way to learn, Col. Tregar says it's simply the only way to cram a lot of information into a very short period of time. There's little time to spend on theory and skills that won't directly relate to the students' army postings later on. "In an academic setting, you'll learn about models for parallel processors and the structure of compilers -- those kinds of things," Col. Tregar says. "It's true it gives you a much broader understanding, but on a practical level, you won't have to deal with them in your first job. People with academic degrees that come to the IDF need to undergo considerable training before being put into practical assignments."

Economist: In 2003, 55% of Israel's exports were high technology, compared with the OECD average of 26%. Tech giants such as IBM, Motorola and Cisco have research centres in Israel, which is also where Intel developed its Centrino chip. Not bad for a country with a population of 6.9m.

Why is Israel—sometimes called the “second Silicon Valley”—so strong in technology? For several reasons, says Mr Mlavsky. First, the pump was primed by government grants in the 1970s, by the BIRD Foundation (a joint American-Israeli initiative that supported many start-ups before VC money was widely available), and by government schemes to encourage Russian immigrants who arrived after the collapse of the Soviet Union.

The second big factor is the army. “The army gets hold of everybody at age 18, and if they have a glimmer of potential, it catalyses their transformation into engineers or scientists,” says Mr Mlavsky. The technically minded are given projects to develop and run, and are allowed to keep any intellectual property that they develop, which results in many spin-outs. It also means that once they get to university, trainee engineers already have practical experience and a problem-solving mentality. Israel has 135 engineers per 10,000 employees, compared with 70 in America, 65 in Japan, and 28 in Britain (see chart).

The small size of Israel's home market is also, paradoxically, an advantage. While a British start-up, say, will look to its home market to get started, Israeli firms cannot. Accordingly, they look to America for customers, so that Israeli start-ups function as “mini-multinationals” from the off—and are instantly exposed to the world's most competitive high-tech market. Similarly, Israel's relative lack of land and resources serves to steer entrepreneurs towards high technology instead.

Naturally, cultural factors play a part too. Around 5% of start-ups in America are headed by repeat entrepreneurs, says Mr Mlavsky, compared with around 30% in Israel. “The whole culture, we're like junkies, and the real kick is success, not the fruits of success, so we want to do it again,” he argues. Israeli entrepreneurs are often workaholics who tend not to change their lifestyles much after becoming successful, he says. Gil Shwed, the boss of Check Point and one of Israel's richest men, still has a regular DJ slot at a Tel Aviv restaurant on Wednesday nights, for example.

The bad news for other countries that wish to encourage the development of their technology industries is that few of these factors can be replicated. Singapore's attempt to establish itself as a biotechnology centre faces the challenge of encouraging risk-taking and entrepreneurialism in a highly conformist society. And Britain is hardly likely to introduce conscription in order to boost the fortunes of the technology cluster around Cambridge University. In technology, as in so many other ways, Israel is a special case.

Chalabi, Hitchens tragicomedy

I don't know whether to laugh or cry. As you may know, Chalabi is the former Iraqi exile (and Chicago math PhD) who conned the neocons with all kinds of crappy pre-war WMD "intelligence," as well as the notion that our troops would be welcomed with flowers (who would you have believed on this, Chalabi or Army Chief of Staff Shinseki?). Rather than being the subject of an FBI/CIA investigation, he is being feted in Washington by Condi and others, and giving a lecture at AEI, apparently attended by Iraq war apologist and self-important blowhard Christopher Hitchens. The little nugget below comes via TalkingPointsMemo.com (see here for more).

Hitchens then turned the subject back to Chalabi, his good friend. I asked him if he thought Chalabi had been passing American intelligence to the Iranians. "No," he insisted. "It's possible that with his training, you know, at [The University of] Chicago that with his own ability he was able to crack the codes. He is a mathematical genius. His expertise is cryptology. It is possible that he broke the codes himself." (This is a paraphrase since I was walking down M Street and crossing Connecticut Avenue all while being amazed that I was having an actual conversation with Christopher Hitchens at the time). Now, I don't believe this for one second. Why would Chalabi be trying to break American codes in his spare time anyway? Who does that if they are friendly to us? Suspicious, I say.

Well, Chalabi's expertise is not cryptography, and no, he didn't single handedly break any Iranian ciphers. What he did was pass on some important intel to the Iranians (that the US had broken their ciphers) that should occasion yet another investigation into neocons leaking classified information.

What makes me most sad is that someone (Hitchens) so ignorant and un-careful in thinking and speaking about topics about which they know nothing could be a public intellectual. But then again in our culture knowledge of basic mathematics or physics is considered geek esoterica whereas an educated person is expected to have read all of Shakespeare.

Baby boom

Invaders: 2, Adults: 0.

The invaders have overwhelmed us! Communications may be interrupted for some time...

VCs, Greenspan and globalization

NYTimes on Silicon Valley VCs and China investments. Note the final paragraph.

WHEN Joe Schoendorf, a Silicon Valley venture capitalist, was in Shanghai a few years ago to hear a pitch from a Chinese start-up company, he sensed something familiar. He interrupted the meeting, walked to the window and pulled back the curtains.

"What are you looking for?" he remembers the would-be entrepreneurs asking.

"I just wanted to make sure I was in China and not back in Palo Alto," he responded.

China's high-technology community, with its brains and competitive spirit, is probably more like its counterpart in Silicon Valley than any other in the world.

Yet Silicon Valley's views of investment in China have tended to swing between wild optimism and deep anxiety - with the anxiety going beyond a fear of losing money. Some worry about helping Chinese start-ups move up the technology food chain.

These days, the Valley venture capitalists are sharply divided in two camps: one rushing into China and one holding back.

...The dominant perspective is that China is a vast sea of opportunity, from its low-cost skilled labor pool to its enormous consumer market that is more than one billion strong.

In fact, it is now routine for venture investors to demand that their start-up firms place the bulk of software development and manufacturing efforts in China or India. (A supply chain problem at a manufacturing arm in China, however, can easily ruin financial results in any given quarter.)

For China skeptics, the concern is that American investment will help energize a formidable competitor, which could come to dominate both markets and technologies.

The fear is based in the Valley's complex relationship with China as supplier, partner, customer and competitor. Most venture capitalists say this evolving relationship will define the future of the Valley and maybe even technology development in the United States.

The Ningbo Bird Company is one case in point. It went from being a contract manufacturing supplier for Motorola to being a serious rival in the Chinese handset market in a matter of a few years.

Still, last year, most of the Valley seemed to throw caution aside as venture firms invested nearly $1.3 billion in China, up nearly 30 percent from 2003, according to Zero2IPO, a venture capital research and consulting company based in Beijing.

But in the first half of this year, investment slowed drastically after several changes in Chinese securities regulations. Those new rules caused "a decline of 50 percent in the first two quarters," said Dixon Doll, managing director of Doll Capital Management, based in Menlo Park, Calif.

The lull is ending, though, in part because of the high-profile success of the initial public offering of Baidu, a Chinese search engine company that was able to raise $86.6 million in August, and a securities rule change in October. In September, Sequoia Capital, a major backer of Google, was reported to be planning a $200 million fund and hiring several employees in China.

That announcement followed an earlier joint agreement this summer by Accel Partners, a leading Silicon Valley firm, and the International Data Group to set up a $250 million fund.

There have even been reports recently that Kleiner Perkins Caufield & Byers, the Valley's highest-profile venture firm, was creating its own China fund, though people briefed on the firm's plans said that was not true. While Kleiner has recently added Colin L. Powell as a partner to serve as a "rainmaker" in Asia, it remains concerned about changes in Chinese security laws that could complicate the return of investment funds to the United States.

Mr. Schoendorf, who is an Accel partner, sees benefits in helping China to become a fierce new competitor. He likens this moment of anxiety and promise to the 1970's, when Japan began to compete successfully with the United States.

"The Chinese graduate more engineers than we do," he said. "They're smart, they work hard, and so the only way to compete with them is to remain more innovative."

WSJ: Greenspan comments on globalization of labor markets. (Holding down inflation is the same as diminished returns to labor...) The bond market reacted negatively to these comments, as Greenspan said the effect would eventually go away. But I think that was a mistake: only the leading edge of those 2 billion workers have been integrated into the world economy -- a distinct minority. It will take decades before that deflationary effect wanes. Not to say that there aren't other inflationary forces at play, like oil and commodity scarcity, but the labor component is deflationary as far as the eye can see. Not only do low-skill workers have little pricing power, but even engineers and service professionals are under pressure from abroad.

The integration of China, India and the former Soviet bloc into the world trading system is helping to hold down inflation but at some point, that effect will fade, Federal Reserve Chairman Alan Greenspan said.

...Mr. Greenspan said the addition of more than 100 million educated workers from former Soviet countries, large segments of China's 750-million strong work force, and workers from India "would approximately double the overall supply of labor once all these workers become fully engaged in competitive world markets," a development that "has restrained the rise of unit labor costs in much of the world and hence has helped to contain inflation."

But while these forces "may well persist for some time," he said, the process and its contribution to inflation control will wane and that "will need to be monitored carefully by the world's central banks."

Black holes for financiers

No, that's not a typo: it's black holes, not Black Scholes :-) I posted the following comment on Brad Setser's blog (mostly read by finance and econ types). He was fascinated by this Times article on a measurement of the size of the supermassive black hole at the center of our galaxy.

It's now widely believed that many galaxies have at their centers supermassive black holes with masses larger than a million solar masses. (The existence of these supermassive holes is a plausible consequence of how galaxies are formed through non-linear growth of density perturbations in the early universe, but that is another story.) Because black holes are dense, even these supermassive black holes are not that large. The one at the center of our galaxy appears to have diameter roughly that of the earth-sun distance (= 93 million miles; the galaxy is 10^9 times larger), and a mass of 4 million solar masses.

It is easy for astronomers to find objects which are so dense that, theoretically, they must be black holes. The thing at the center of our galaxy is one example; there are many more that are remnants of stellar evolution (very large stars that run out of fuel and collapse to form black holes -- these are only a few orders of magnitude more massive than our sun). To estimate the density astronomers need to measure the mass (based on the gravitational pull exerted on nearby objects such as stars) and size of the object.

The recently reported findings have to do with radio astronomers looking at the black spot caused by absorption of radio waves coming from behind the black hole. They can measure the radius of the black spot to estimate the size of the black hole.

What is most interesting about black holes is the general relativistic effects associated with their "horizon" -- particles, even photons, which pass the horizon can never escape and are doomed to eventually fall into the "singularity" inside the black hole where (according to general relativity) known physics must break down. Unfortunately, based on what I just said, outside observers will never know what happens at the singularity since the object falling in cannot send a signal back out once it has passed the horizon!

To establish the properties of the horizon predicted by general relativity would require probes which signal back to us as they fall in. (They would go dark just as they hit the horizon -- their signal would be "infinitely redshifted.") Astronomical observations are not really enough (although these radio observations are a step in the right direction) since in principle a very dense object which isn't necessarily a black hole might absorb photons (radio waves) to yield a black spot. The identification of an object as a black hole simply based on its density relies on general relativity in a domain in which the theory has not been tested experimentally.

Economist on intellectual property

The Economist has a nice survey on patents and IP. As I mentioned in an earlier post, the US patent system (esp. for software) is pretty broken right now. The Economist looks forward to a day when ideas themselves can be bought and sold like any other product. In such a world, some firms might specialize solely in innovation, leaving other tasks like manufacturing, marketing and distribution to others. Of course, this assumes a smoothly functioning IP system, which seems very far off. At the moment, the legal costs of resolving a patent dispute are sufficiently high that startups (which produce a disproportionate amount of innovation) often cannot afford any confrontation with a public company. Given that many big companies are aggressively pursuing a patent-hoarding strategy (hiring more patent attorneys, but perhaps not more scientists!), this may have a negative effect on innovation. See here for leading patent recipients in 2004.

It can take years of hard work, and millions of dollars, for VCs, inventors and entrepreneurs (all of whom have "skin in the game") to determine the worth of an idea. (In this process, the original idea is almost always revised in important ways.) Thus, even if a liquid market for patented ideas existed, valuation would be a very difficult problem. It is true that large companies often sign bulk cross-licensing agreements (for example, Sony and Samsung have cross-licensed a huge number of patents), but I have a hard time imagining a future where I can list a clever idea on EBay and sit back to consider bids from around the world.

The new predominance of intellectual property in technology industries is fed by a number of broader industry trends. First, IT and telecoms have become so complex that there is a greater willingness to accept the innovations of others. Gone are the days when vertically integrated firms handled every step of a product, from initial design to final sale. Now, a small army of specialist firms focus on narrow portions of technology, using intellectual-property rights to protect their inventions when they are licensed out.

Second, as many new technologies quickly turn into commodities, firms increasingly rely on innovation to remain competitive. Yet the return on investment in R&D is short-lived because more people innovate at a far faster pace than before. That means margins have shrivelled, explains Ragu Gurumurthy of Adventis, an IT and telecoms consultancy. “How to recoup the cost of innovation? By licensing the technology,” he says.

Third, customers are demanding “interoperability” and common standards rather than proprietary systems, which means different firms' technologies must work together smoothly. This often requires pooling patents or cross-licensing agreements.

Fourth, generating intellectual property is less capital-intensive than other aspects of the IT businesses because it relies mainly on people rather than bricks, mortar and machinery. That makes it attractive to many start-up firms. Venture capitalists often demand that firms patent technology, both to block rivals and to have assets to sell in case the firm flounders. This was particularly apparent during the internet boom in 2000. “In addition to the dotcom bubble, we had a patent bubble,” says Mark Webbink of Red Hat, a firm that sells Linux, an open-source operating system.

Companies cannot simply turn their back on what is happening in intellectual property. Even if they refuse to play the game, they may be unwittingly infringing someone else's patents because there are so many more of them around. Unless firms have patents of their own to assert so they can reach a cross-licensing agreement (often with money changing hands too), they will be in trouble. Thus many companies are acquiring large numbers of patents for purely defensive reasons, for use only to keep others' patent threats at bay.

...But when talking to executives in the technology firms themselves, the language you hear most often is that of “the arms race” and “mutually assured destruction”. Companies amass patents as much to defend themselves against attacks by their competitors as to protect their inventions. Many technology companies have recently championed reform of the patent system to deal with spuriously awarded patents, licensing extortion and massive lawsuits. “There is a broad recognition in the US that the patent system, if not reformed, will...begin to impede American competitiveness around the world,” says Bruce Sewell, general counsel of Intel, the world's biggest chipmaker.

This survey will argue that, despite such adjustment problems, the huge changes in intellectual property currently taking place in the IT sector will in time produce more efficient markets. But what do the IT firms themselves make of it all?

See also this article in the survey on IP in China and India.

The rise of China and India has mainly been underwritten by foreign companies, not indigenous ones, though this is starting to change. Both countries have been good at persuading firms setting up operations there to invest in training locals. Today, nearly all the large IT firms have big research centres in both countries, and local companies understand the need to develop their own intellectual property. Local people who went to Silicon Valley to find fortune are now starting up their own businesses in their home countries. Foreign venture capital is pouring in.

Without home-grown technology, India and China have to depend on foreign firms, and they do not like it. China, in particular, has seen a surge in the royalties it is paying to foreign firms, and is trying to stem the flow. When Qualcomm's boss went to China in 2001 to negotiate royalty payments for his company's third-generation mobile-phone standard, he agreed to accept less than what he charges others. Within a year, China was working on developing its own 3G wireless standard. If it succeeds, Qualcomm will see its royalties shrink further.

China and India have more to offer than just low costs, although these are clearly important. They are also able to deploy huge numbers of people to work on a project. Being able to throw bodies at a problem is vital in IT. It allows firms to do things such as speed up development cycles or explore alternative approaches that would not be possible with a smaller labour force.

In short, China and India are not simply taking over western IT jobs, they are changing the very process of IT development. It is not about doing the same thing cheaper, but about doing things that simply could not be done before. In that endeavour, intellectual property is becoming increasingly important.

There are limits to the optimism about India and China. Both countries have a culture of keeping technology to themselves. The western concept of patents is fairly new to them, and has proved controversial for countries at their stage of development. Also, both nations have huge institutional and infrastructure obstacles to overcome. Capital markets are embryonic. Big companies are coddled by the state. India's government bureaucracy is stifling; China's is opaque and corrupt. The legal system is uneven in India and consistently inadequate in China. Both countries badly need more experienced managers.

American technology executives with some experience of India and China are worried that the two are about to eat the rich world's lunch, but locals with deep knowledge of both countries think it will take at least a decade. Still, the overall trend is clear: the rise of China and India as centres of innovation will radically shake up the technology industry that is today based mainly in rich countries.

...Take Huawei Technologies, a big vendor of communications equipment, with revenues of $5.6 billion in 2004. This year, revenue from abroad is expected to surpass that from domestic customers for the first time. Around half of its 34,000 employees do R&D work, claims the company. Its patent filings almost doubled each year during the 1990s, though they have recently started to slow somewhat: the number this year will be around 2,400, and from next year it is expected to settle at around 3,000 a year. In 1995 the company created a special department to work on patents, which currently has 100 people on the payroll but will expand to twice that number next year.

“If you didn't have patents, you would be in a very disadvantaged position relative to your competitors,” explains Liuping Song, the head of Huawei's intellectual-property department, at the firm's headquarters in Shenzen. “Other companies approach you and charge you for using their patents.” So is the firm chasing after patents simply because other companies are doing the same thing? Mr Song laughs and says, “That is a difficult question to answer.” Then he adds: “We have to play by the rules of the game.”

Google ads

Nice article in the NYTimes describing Google's main revenue source: advertising. As a veteran of this era, I witnessed advertising as a revenue model go from very successful (circa 1999, mainly due to cost-per-view purchases by huge dotcoms willing to pay to aggregate eyeballs) to horrible (circa 2002, as supply outstripped demand and cost-per-view became cost-per-click, and then cost-per-action), and finally to success again, with auction models and a shortage(!) of prime ad space. It was one of the wildest swings in value of a commodity (Internet advertising) ever witnessed -- probably a swing on the order of a factor of 100 within a few years. (For veterans, from CPM of $10 to complete inability to sell CPMs at all, and an implied CPM value using click-through or action rates of less than 5 cents or so...)

Very few people know that it wasn't Google that pioneered the ultimately successful auction model (now used by Yahoo, Google and MSN). It was Bill Gross' Goto.com, which became Overture, which was acquired for billions by Yahoo. The Times article does a good job of clarifying exactly how innovation proceeded. Note how young (and smart!) the people involved were (are). Gross is a Caltech grad, Brin and Page were Stanford PhD students, Schmidt is a Berkeley PhD and Kamangar is a Stanford grad. It's yet another case of the non-linear value of brainpower in this century...

In early 2002, a Google employee, Salar Kamangar, now 28, convinced Mr. Schmidt and the founders to switch to an auction-based system like the one set up by Bill Gross, the head of IdeaLab. Mr. Gross had created Goto.com, a search engine made up entirely of ads, where advertisers paid only if their ad was clicked on, and the advertiser who bid the most per click was listed first. (Goto was later renamed Overture Services and then bought by Yahoo, an early Google backer that has become its fiercest rival.)

Mr. Kamangar, though, had an important improvement on the model. Rather than giving priority to the advertisers that bid the most per click, as Goto did, he realized that it was better to save the front of the line for ads that brought in the most money - a combination of the bid and the number of clicks on the ad. This was not only more profitable, but it also linked readers to ads that were more relevant to them. He also figured out that the system should use what is called a Vickrey auction - that is, to charge the winner only one cent more than the second-highest bidder. That gives advertisers an incentive to bid high, knowing that they will not be penalized if they are far higher than the rest of the market.

Mr. Page and Mr. Brin were suspicious of any system that put high-bidding advertisers at the top, Mr. Kamangar said. "They thought if someone was willing to pay more it was a negative," he recalled. But he was able to convince them that the site could be improved by incorporating how often users clicked on an ad.

Mr. Schmidt, who was still new as chief executive, was worried more that moving to an entirely auction-based system - amid a recession in online advertising - could be financially disastrous. "I said to Salar, 'Promise me the revenue won't go down,' " Mr. Schmidt said. "I was afraid people would realize these ads were worthless." In fact, revenue quickly increased tenfold.

As Google's audience took off, advertisers came running - many thousands of smaller ones at first, but soon large companies as well. Among Google's largest advertisers is eBay, which has long bought keywords for nearly every sort of merchandise it sells.

"The smartest thing that Google did was getting smaller advertisers to buy in," said Ellen Siminoff, the chief executive of Efficient Frontier, an agency that helps advertisers manage their campaigns on search engines. She estimates that Google has two to three times as many advertisers as Yahoo does, largely because Yahoo has a 10-cent minimum bid. This lets Google earn money on more obscure search terms for which rivals have no ads.

This growing advertising business gave Google the confidence to expand its audience. Most significantly, in 2002, America Online brought in Google to replace Overture, which provided both search and search ads; that deal enshrined Google as the premier search engine and ad network. Google won the deal by guaranteeing AOL a substantial sum, which it would not disclose. Google was willing to make that bid only because of its confidence in its advertising sales prowess. "If we were wrong," Mr. Kordestani said, "there were some scenarios that would bankrupt the company."

But by that point, Google had figured out that the same sort of computing and engineering skill that it used to find Web pages could also be used to improve the quality and, ultimately, the profitability of advertising. "Initially, we didn't understand how fundamental the computer science was in advertising," Mr. Schmidt said. "We didn't have enough staffing or focus on this area. I managed to fix that."

GOOGLE introduced its current system for determining which ad to show on which page late last year. It is a wonder of technology that rivals its search engine in complexity. For every page that Google shows, more than 100 computers evaluate more than a million variables to choose the advertisements in its database to display - and they do it in milliseconds. The computers look at the amount bid and the budget of the advertiser, but they also consider the user - such as his or her location, which they try to infer by analyzing the user's Internet connections - as well as the time of day and myriad other factors Google has tracked and analyzed from its experience with advertisements.

"If someone is coming from a particular location, a certain ad may be more popular there," explained Jeff Huber, Google's vice president for engineering. "The system can use all the signals available, and the system itself learns the correlations between them."

Babies arrived

Sorry for the lack of posts. I've been a bit busy with some new additions to the family :-)

One year anniversary

Wow! My blog is one year old now. The first post was 10/24/04, on revealed preferences and college rankings, and there have been 319 posts since then.

Some recurring topics?

globalization: China, India, US competitiveness, Bretton Woods II

finance: derivatives, volatility, equity risk premium, CDOs, bounded cognition, hedge funds, housing bubble

startups and Silicon Valley
my research in theoretical physics
science as a (bad) career choice
artificial intelligence
race and genetics
internet security

You can find posts on each topic using Google and the additional search term site:infoproc.blogspot.com. For example, here are all the places on my blog where the term singularity appears.

A list of pages that link to this blog.

Book of the month

We already have a favorite prescient cartoon, now for our favorite prescient book. (See here for the latest developments. Has Fitz flipped Libby?)

Worse Than Watergate: The Secret Presidency of George W. Bush by John Dean.

For those who don't recall the name, John Dean was Nixon's White House counsel (not to be confused with Harriet Miers), who turned witness for the prosecution and pled guilty to obstruction of justice. It takes one to know one. You can't con a con man. Don't kid a kidder, etc., etc.

From the reviews:

John Dean goes further back, seeing in Bush all the secrecy and scandal of Dean's former boss, the notorious Richard Nixon. The difference, as the title of Dean's book indicates, is that Bush is a heck of a lot worse. While the book provides insightful snippets of the way Nixon used to do business, it offers them to shed light on the practices of Bush. In Dean's estimation, the secrecy with which Bush and Dick Cheney govern is not merely a preferred system of management but an obsessive strategy meant to conceal a deeply troubling agenda of corporate favoritism and a dramatic growth in unchecked power for the executive branch that put at risk the lives of American citizens, civil liberties, and the Constitution.

...For a convicted felon, John Dean is an exceptional author. I remember reading his own recollections of the Watergate affair and his own association with the subsequent events that led both to his own denouement and the resignation of Richard Nixon in disgrace in "Blind Ambition" in the mid 1970s. Once again he weighs in impressively by building a very strong circumstantial case for the investigation and possible prosecution of President George W. Bush for criminal actions that Dean terms to be indeed, "worst than those of Watergate". Culling from public records and the recollections of other eye-witnesses, Dean shows how Mr. Bush has systematically exaggerated, embellished, and engineered a series of preverifications and outright lies to the American public in an effort to convince us of the need for military intervention in Iraq.

Google print

For anyone who hasn't played with this new tool, I highly recommend it. It is a shame that publishers are suing to prevent the further scanning of books into Google's database.

Try the following search:

"ellsberg plumbers"

Which brings up (third result) The Columbia Guide to America in the 1960s, edited by David R Farber, Beth L Bailey:

The first major episode in what came to be called the Watergate scandals occurred in July 1971. At Nixon's orders, White House aides had formed a secret group called the Plumbers, to plug all leaks of secret information from the executive branch.

The Plumbers' first target was Daniel Ellsberg. A former Pentagon consultant, Ellsberg had inspired Nixon's wrath by leaking a secret government report on the Vietnam war, dubbed the "Pentagon Papers," to the New York Times. These documents revealed that the U.S. government had continuously misled Congress and the American people about the course of the war... in hopes of destroying Ellsberg's credibility, the Plumbers broke into his psychiatrist's office, looking for embarassing personal records.

Next, I recommend the key words "perjury obstruction conspiracy watergate".

Finally, search using "ecclesiastes new sun" to find that there is nothing new under the sun :-)

The fire this time

I'm sure current defenders of Bushco would have been just as quick to defend Ehrlichman and co-conspirators back in 1973, until admitting belatedly, 10 years later, that they were indeed criminals whose activities threatened to undermine our Republic. Let's see what current Bush supporters will have to say 10 years from now.

Note the parallels between Nixon's cronies trying to silence or discredit Daniel Ellsberg's criticism of the Vietnam war, and Bushco's attack on Joe and Valerie Wilson.

From the discussion of this blog post, analyzing how Judith Miller was caught in a perjury trap by Fitzgerald (resolving the mystery of how she "found" her lost notebook and why she had to testify twice). Apparently, Secret Service records showed her meeting Libby at the White House on June 23.

While I cannot know which of the convicted felons involved in the Watergate crimes was Buchanan's "good friend," it is certainly true that some people went to prison for telling a grand jury, "I can't recall" when that was false.

For example, White House domestic policy assistant John Erlichman was indicted on September 4, 1973. Count 4 of the indictments issued by the a grand jury against John Erlichman and others (CR 74-116, United States District Court for the District of Columbia) charged that Erlichman violated Title 18, United States Code, Section 1623, which makes "False declarations before grand jury or court" . His crime occurred in this exchange:

Q. Just so that the Grand Jury and we are clear on this, prior to receiving information about the break-in, you had no information, direct or indirect, that a psychological profile of Dr. Ellsberg was being drawn up?
A. I can't recall hearing of a psychological profile until after I had heard or the break-in.

5. The underscored [boldfaced] portions of the material Declarations quoted in paragraph 4, made by JOHN D. EHRLICHMAN, the DEFENDANT, were material to the said investigation and, as he then
and there well knew, were false. (Title 18, United States Code, Section 1623.)

http://www.watergate.info/judici...ciary/ APPII.PDF at pages 19-21 (indictment starts at page 12).

Erlichman was found guilty of this count and 2 other counts. http://www.watergate.info judici...ciary/ APPII.PDF at page 9. He was sentenced to serve a prison term of 20 months to 5 years for conviction on 3 counts.

Egil Krogh avoided conviction on a similar count of falsely declaring when he said that he was not aware of certain travel. He avoided that conviction because instead he entered a guilty plea on another matter in a plea agreement with the prosecution. Pages 29-31 of same.

Krogh made a statement to the court upon entering his guilty plea, to the effect that the actions of retaliation against a critique of the war in Vietnam were an invasion of the rights of Dr. Ellsberg. He stated:

"But however national security is defined, I now see that none of the potential uses of the sought information could justify the invasion of the rights of the individuals that the break-in necessitated. The understanding I have come to is that these rights are the definition of our nation. To invade them unlawfully in the name of national security is to work a destructive force upon the nation, not to take a protective measure." (http://www.watergate.info/judiciary/APPII.PDF at page 61)

Of course, it's not only Judith Miller who "could not recall" some things, but some of the principals in the White House. Those supposed lapses in memory could be the basis for indictments if Fitzgerald has evidence that a claim of lapsed memory is bogus.

From that well-known liberal newspaper, the WSJ:

Yesterday, one former administration official said Karl Rove, the deputy White House chief of staff, had discussed former diplomat Joseph Wilson and the role of his wife, Ms. Plame, with White House staffers in 2003. That buttresses the possibility that Mr. Fitzgerald is investigating charges related to leaking classified information.

The former official said Mr. Rove had these discussions after Mr. Wilson went public with claims that the Bush administration had twisted intelligence to build support for the Iraq war. Mr. Rove discussed discrediting Mr. Wilson, the former official said, adding that Mr. Rove didn't necessarily name Ms. Plame or make her a key talking point in conversations with other White House officials.

Hard rain's gonna fall

In an unguarded moment during the last campaign, John Kerry said (not knowing a microphone was on): "These guys are the biggest bunch of crooks you've ever seen."

Chris Matthews:

If there are indictments, they're going to be probably in the vice president's office, they're probably going to come next week and they are going to blow this White House apart.

It's going to be unbelievable.

I think the people watching right now who are voters better start paying attention to this issue. It's not just about whether somebody's name was leaked, it's about whether we went to war under false pretenses or not, whether people knew about that or not, and what they did when they were charged against that kind of offense against the United States.

It's serious business.

and from Pat Buchanan:

During Watergate, a good friend went to prison for saying twice before a grand jury, "I can't recall." That was about a picayune matter compared to Judy Miller's "I can't recall" to the question, "Who gave you this name, 'Valerie Flame'?"

So, my guess is that there are multiple indictments coming, for lying to investigators, perjury, obstruction of justice, and disclosure of national security secrets for political purposes. And maybe conspiracy....

Though this case may be narrowly about whether Libby or Rove lied to investigators or the grand jury, it could also become about whether we were lied into a war General Odom calls the "greatest strategic disaster in the history of the United States."

There is simply no good news here for Bush & Co., unless Patrick Fitzgerald declines to indict anyone. If, however, Fitzgerald comes down with no indictments, some journalists will have to be put on suicide watch, so heavy is their psychological and emotional investment in this case.

From DailyKos. Also, see our favorite prescient cartoon.

Plamegate indictments?

Will Cheney be indicted? Will there be a conspiracy charge against members of the White House Iraq Group (WHIG)? Did Fitzgerald flip one or more White House staffers? Will Karl Rove be frog-marched out of the White House in handcuffs? It's either the calm before the storm, or an anticlimactic end to this long running investigation. See here for obsessive sleuthing and analysis, including comments like the following. Are they living in an alternate universe, or is the Watergate scandal of our generation about to unfold?

Perhaps it is a bit premature to say so, as the indictments haven't been handed down yet - but it seems to me that the Republic has in essence been saved through the efforts of one lone tenacious prosecutor. He is the Bernstein and Woodward of our day.

...and because the disgraceful MSM hasn't done their job in reporting on this story to the public, it will come as quite a surprise to many people when the VP and half the neo-cons who have been in control of this country go down in the next week or 10 days.

Also, see our favorite prescient cartoon.

Equilibration can hurt

More on Delphi's bankruptcy from the WSJ. For those who don't follow globalization, Delphi (a huge auto-parts supplier spun out of GM) provides one of the clearest examples of the economic handwriting which has been on the wall for many years now. Previous posts here and here.

First, from an interview with Delphi CEO Steve Miller:

Mr. Miller: Globalization is a fact of life these days. What has been brought into sharp relief is the differing value the global market places on knowledge workers versus basic manufacturing workers. I was struck by what I saw when I visited our Delphi operations in Mexico last week. Our average hourly worker makes about $7,000 a year, while the average salaried worker makes about $35,000 a year. A spread of five times. The same spread, or wider, exists in all low-cost countries. The implications for America are enormous, and it boils down to this. If you want your kids to enjoy the great American dream, get them a good education. The days when manual unskilled labor can deliver a $65-per-hour wage are disappearing.

...

WSJ: Last year, your predecessors negotiated a two-tier wage deal that lowered wages for new hires to the $12-to-$16-an-hour range. Your most recent proposal, according to the UAW, was $10 an hour in wages with a total package of $20. What is a competitive wage package for you?

Mr. Miller: You've got to think of two kinds of components. There are things that are labor intensive, very small. You can put a thousand of them in a box and ship them across the ocean. Those things are going to be made in low-cost countries. They're not going to be made in America. Not for $10 an hour or $5 an hour. They are going to be made for $2.

There are other components like manifold covers for engines that are huge assemblies with all kinds of sophisticated electronic parts and fuel-feeding parts. Those are high value and logistically so hard to handle they have to be made next to the customer, close to the final assembly plant. Those will be made in America. But they will be made by people who have competitive, American industrial wages. And a competitive American industrial wage is, all in, about $20 an hour, in round numbers.

And to get $20 an hour all in, and have a health-care plan, pay the workers' comp bill, which is high in the states we are in like New York, Ohio and Michigan, then wage, retirement, then, bang, at a $10 wage you are already hovering around $20.

Now, the UAW has organized workers that are in the $20-a-hour all-in range and they are suppliers and they compete with us. So this isn't about breaking a union. This is about simply transforming our workplace to be competitive with other U.S.-based suppliers for components that can be made in this country.

Second, an interview with Delphi's VP for Asia-Pacific operations.

Delphi Corp., which is preparing for a painful reorganization to pull through bankruptcy protection, pays its U.S. unionized workers $27 an hour. Throw in health and retirement benefits, and the cost is more like $65.

In China, Delphi pays its workers roughly $3 an hour, about a third of which goes to medical and pension benefits. Delphi also throws in a bus ride to work each day and free lunch in the factory canteen.

The huge difference in labor costs helps explain why Delphi's Asian division is profitable, and thus exempted from the company's bankruptcy filings. It also explains why the Asian division is hiring even more workers as it expands across the region, supplying not just General Motors Corp., but Toyota Motor Corp., Hyundai Motor Co., Nissan Motor Co., Honda Motor Co., Volkswagen AG and a slew of coming Chinese makers.

As a result, Delphi's Asian division is playing a major role in one of the world's largest hypergrowth markets, with customers from China to India to Southeast Asia buying their first automobiles along with their entry into the middle class.

Delphi is in trouble because "the U.S. is losing money, but we are not," says Choon T. Chon, Delphi's vice president in charge of Asian-Pacific operations. "Asia is our future."

Asia is still a small part of Delphi's overall annual sales of $28.6 billion. But its $1.1 billion in Asian sales of auto components is more than double what the company made in Asia five years ago and has been growing more than 15% a year. Indeed, Delphi's 35 ventures in plants and technology-development centers in Asia are providing a key growth engine that is likely to help drive the company through its current crisis.

The 58-year-old Mr. Chon, who has been head of Delphi's Asia operations since 2000, is charged with the important task of keeping the region's operations humming. The Korean-born Mr. Chon, an industry veteran who has worked for GM, Ford and Chrysler, isn't an executive who minces words. He has been explaining the bankruptcy filing of the U.S. operations to his staff and customers by likening Delphi's Asian operations to the children of a sick American mother.

"Our mother has a tumor. This tumor is the UAW," he says, referring to the powerful union that represents 25,000 of Delphi's employees in North America and 10,000 retirees. Still, he is careful to remain optimistic. "We know that she's going to come out of the hospital very well," he says, referring to the U.S. company's Chapter 11 bankruptcy-protection status.

The UAW has equally critical words for Delphi's management, saying it is "unfair that the law allows Delphi to put its U.S. operations into bankruptcy, while leaving its foreign operations untouched," according to a union statement. Benefits in China are far less expensive than those provided to UAW members in the U.S. Roughly $1 of every $3 Delphi pays for hourly labor in China goes toward housing subsidies, medical and employment insurance, and a modest pension scheme that few believe is big enough to provide a significant source of retirement income.

...Delphi, which has roughly 135,000 employees outside the U.S., has poured $500 million in investments in China since 1993, making a slew of auto parts -- sparkplugs, battery cables, brakes, radiators -- not only to supply the booming China market, but also to export from China to markets elsewhere. It is building similar operations in other countries with ambitions of developing their own auto industry, like Thailand and Indonesia. It is also building advanced technical-development centers in South Korea and Japan to work with the region's powerhouses like Toyota and Hyundai.

Like other U.S. companies, Delphi sees immense export possibilities from China. But for now the company is preoccupied with trying to keep up with demand in the domestic Chinese market. Two years ago, Delphi broke ground for a $40 million, 200,000 square foot car electronics-parts plant in the coastal city of Suzhou, employing 600 people. The original plan was to produce electronic gadgets for export, but China is growing so fast that managers changed the focus to supplying domestic customers.

Mr. Chon says the key to success in China is training local managers. A crucial job for the dozens of U.S. expatriates across the region is to train local staff to take over local operations. "I have told all my expats, 'When you leave, there are no more Americans coming.' "

El-Erian to run Harvard endowment

I guess I should reevaluate my investment in PIMCO's emerging markets bond fund, made mostly based on El-Erian's reputation :-)

I can't imagine El-Erian will make much less than Meyer did, which will probably continue to irritate certain alumni. See earlier post.

Harvard Hires Pimco's El-Erian to Run $25.9 Billion Endowment
2005-10-14 10:25 (New York)

By Brian K. Sullivan and Matthew Keenan
Oct. 14 (Bloomberg) -- Harvard University is hiring Mohamed El-Erian, who oversees emerging-market debt investments at Pacific Investment Management Co., to run its endowment.

El-Erian, 47, will be chief executive officer and president of Harvard Management Co., which manages the $25.9 billion fund for the Cambridge, Massachusetts, university, replacing Jack Meyer who resigned to start a hedge fund, Harvard said in a statement today.

El-Erian has been a managing director at Newport Beach, California-based Pacific Investment Management, known as Pimco, since 1999. He oversees more than $28 billion, making him the world's biggest buyer of emerging market debt.

Harvard's endowment under Meyer was consistently a top performer. Its investments returned 19.2 percent in the year ended June 30, almost triple those of U.S. stocks and bonds. Even so, Harvard Management has been criticized for paying its
managers too much, a factor in Meyer's decision to leave.

El-Erian's flagship $2.9 billion Emerging Markets Bond Fund has a five-year annualized return of 19 percent, ranking ahead of 90 percent of competitors, according to data compiled by Bloomberg. In the past year, the fund has gained 10 percent, trailing 69 percent of rivals. He also manages Pimco's Floating Income and Dividend Income funds.

El-Erian spent 14 years at the International Monetary Fund, where he rose through the ranks to become deputy director. He left in 1997 and was a managing director at Salomon Smith Barney before joining Pimco, a unit of Munich-based insurer Allianz AG. He earned his undergraduate degree in economics at Cambridge
University and a master's and doctorate at Oxford University.

Endowment Returns

El-Erian spent much of his youth in Egypt and Europe, becoming fluent in Arabic, English and French. His father, Abdallah, was a lawyer and diplomat who represented Egypt at the United Nations in New York and was ambassador to France and
Switzerland.

His appointment was reported earlier today by the Boston Globe.

Harvard has been one of a few U.S. universities that relies on in-house managers to invest its endowment fund. Under Meyer, the proportion of money managed by outsiders has increased to 50 percent from 15 percent, with the university parceling out billions to companies formed by departed Harvard Management employees.

Harvard had named Peter Nadosy, former president of Morgan Stanley Asset Management, to fill in for Meyer, 60, until a permanent replacement was hired. Meyer, who said in January he planned to start a hedge fund, will take about 30 Harvard Management employees with him. His firm, Convexity Capital Management LP, will manage about $500 million for the college.

Under Meyer, the endowment had grown from $4.7 billion over 15 years. The fund had a 16.1 percent average annual gain in the 10 years through June, compared with an 11.8 percent increase of the university's internal benchmark.

Message from Linde

Andre Linde (Stanford) sends some interesting comments on our paper Message in the Sky. He points to an earlier paper of his, and a nice interview in Slate, where he discusses the idea of creating a universe in the lab. In the comments section of the previous post I mentioned that one of the reasons I had been thinking about this topic is the work of Farhi and Guth (MIT) on the behavior of a false vacuum bubble created in the lab. I hadn't known that Andrei had also worked out the solution (although I should have). A false vacuum bubble can expand in a non-Euclidean way, so that the observer in the lab sees the bubble shrink while an observer inside sees it expand (inflate).

Andrei also had the idea that the creator of the bubble universe might like to send a message to its future inhabitants. He discusses tuning the fundamental parameters so that physicists in the bubble universe would understand that their physical laws had been adjusted just-so. Our proposal allows a bit more information to be encoded (or rather, read out), but the idea is similar. The problem with having special values of the constants is that some nutty physicists might come up with anthropic reasons explaining those values, and not figure out it was done intentionally ;-)

But why bother making a universe if it's going to run away from you? Wouldn't you want to have some power over how your creation unfolded, some way of making sure the beings that evolved in it turned out well? Linde's picture was as unsatisfying as Voltaire's idea of a creator who established our universe but then took no further interest in it or its creatures.

"You've got a point," Linde said. "At first I imagined that the creator might be able to send information into the new universe—to teach its creatures how to behave, to help them discover what the laws of nature are, and so forth. Then I started thinking. The inflation theory says that a baby universe blows up very quickly, like a balloon, in the tiniest fraction of a second. Suppose the creator tried to write something on it surface, like 'Please remember I created you.' The inflationary expansion would make this message exponentially huge. The creatures in the new universe, living in a little corner of one letter, would never be able to read the whole thing."

But then Linde thought of another channel of communication between creator and creation—the only one possible, as far as he could tell. The creator, by manipulating the cosmic seed in the right way, has the power to ordain certain physical parameters of the universe he ushers into being. So says the theory. He can determine, for example, what the numerical ratio of the electron's mass to the proton's will be. Such ratios, called constants of nature, look like arbitrary numbers to us: There is no obvious reason they should take one value rather than another. (Why, for instance, is the strength of gravity in our universe determined by a number with the digits 6673?) But the creator, by fixing certain values for these dozens of constants, could write a subtle message into the very structure of the universe. And, as Linde hastened to point out, such a message would be legible only to physicists.

"You might take this all as a joke," he said, "but perhaps it is not entirely absurd. It may be the explanation for why the world we live in is so weird. On the evidence, our universe was created not by a divine being, but by a physicist hacker."

Linde's theory gives scientific muscle to the notion of a universe created by an intelligent being. It might be congenial to Gnostics, who believe that the material world was fashioned not by a benevolent supreme being but by an evil demiurge. More orthodox believers, on the other hand, will seek refuge in the question, "But who created the physicist hacker?" Let's hope it's not hackers all the way up.

Message in the Sky

New paper! To appear 10/12 (evening) on arxiv.org. It sounds a bit like science fiction, but the basic observation is true: by fine-tuning the fundamental interactions of physics (i.e. the inflaton potential), a supreme being could have encoded a message visible to all sufficiently advanced civilizations in the universe. The message requires no further intervention in the universe after the Big Bang. Now, the question is: is there any message hidden in the CMB? What would it be? In my opinion, the consequences are much more profound that those of SETI!

http://arxiv.org/abs/physics/0510102

Title: Message in the Sky
Authors: S. Hsu and A. Zee

We argue that the cosmic microwave background (CMB) provides a stupendous opportunity for the Creator of our universe (assuming one exists) to have sent a message to its occupants, using known physics. The medium for the message is unique. We elaborate on this observation, noting that it requires only careful adjustment of the fundamental Lagrangian, but no direct intervention in the subsequent evolution of the universe.

Globalization and the rust belt

In an earlier post we discussed GM parts supplier Delphi's problems, stemming from global competition. Now Delphi is about to enter Chapter 11 bankruptcy, with executives preparing golden parachutes and to loot the pension fund. CEO Miller offers to protect the pension if workers will agree to work for 30%(!) of previous wages. Sounds awful all around. Of course, union workers were previously making $65 per hour including benefits. It doesn't take a genius to understand that there was no way that could continue in the face of economic globalization. Even $20 per hour sounds high compared to wages you-know-where.

See here for discussion of how Delphi's bankruptcy might impact CDO markets.

Delphi Corp. Chairman and Chief Executive Officer Robert S. "Steve" Miller said the big auto supplier, which filed for bankruptcy protection Saturday, could still save its pension plan for U.S. hourly workers, but only if unions agree to work for about a third of their old pay and benefits.

Mr. Miller, in an interview yesterday, also said he would take a "significant" cut in his $1.5 million salary, "if that's what is needed." And he defended moves by Delphi to improve severance packages for its top 21 executives.

...Delphi's sweetened executive package included stock for 600 executives around the world and bigger cash bonuses for top U.S. executives. Severance packages were extended from 12 months to 18 months.

...Those moves were blasted by United Auto Workers union President Ron Gettelfinger on Saturday, who called them a "disgusting spectacle." The UAW represents 25,000 active Delphi employees and about 10,000 retirees.

Delphi's decision to seek bankruptcy protection comes at a time of enormous stress for the UAW, which is also under pressure to make wage and benefit and job protection concessions at GM.

Under Delphi's proposed schedule, it would make offers to its unions by Oct. 21. If no agreements are reached by Dec. 16, the company would request to terminate the contracts in court on Jan. 17.

The UAW's decision to reject Delphi's demand to cut UAW wages and benefits contributed to Delphi's decision to seek Chapter 11 bankruptcy protection. The average union worker's wage-and-benefit package at Delphi is about $65 an hour, according to Delphi. Last week, just days before Delphi filed, the UAW rejected demands to cut workers' pay package to $16-$18 an hour.

The UAW, in a statement posted to its Web site yesterday, expressed disgust at Delphi's decision to sweeten executive severance packages, and offer executives as much as 10% of the restructured company and $90 million in bonuses.

Meanwhile, the WSJ points to boom times in Nagoya (home to Toyota, among other multinational giants), where Japanese manufacturers have climbed the value chain while outsourcing lower end production to China. See also this Economist survey on Japan.

Life in Hell

Did I mention Matt Groening is a genius too? This cartoon is more relevant than ever... let's see what happens to the unindicted co-conspirator-in-chief :-)

Fearful symmetry

William Blake (1757-1827)

The Tyger

Tyger! Tyger! burning bright
In the forests of the night,
What immortal hand or eye
Could frame thy fearful symmetry?

The New Yorker take:



Also the title of a popular science book on particle physics, by one of my collaborators:

Entanglement entropy

New paper! Available on arxiv.org:
http://arxiv.org/abs/hep-th/0510021.

Slides for a related talk.

Entanglement entropy, black holes and holography
Authors: R. Buniy, S. Hsu

We observe that the entanglement entropy resulting from tracing over a subregion of an initially pure state can grow faster than the surface area of the subregion (indeed, proportional to the volume), in contrast to examples studied previously. The pure states with this property have long-range correlations between interior and exterior modes and are constructed by purification of the desired density matrix. We show that imposing a no-gravitational collapse condition on the pure state is sufficient to exclude faster than area law entropy scaling. This observation leads to an interpretation of holography as an upper bound on the realizable entropy (entanglement or von Neumann) of a region, rather than on the dimension of its Hilbert space.

Globalization update

Brad Setser writes on how France and Germany are adapting to economic globalization.

My colleague Mark Thoma (Economist's View blog) reviews the figures on manufacturing employment in the US and abroad. (It's way down in all developed countries.)

From Brad Setser (quoting Steve Roach of Morgan Stanley):

That brings me to a column Stephen Roach wrote last week, one that I think should have received a bit more attention. He implicitly argued, accurately in my view, that the political response to rising competitive pressures in the global economy in US has not been terribly impresive.

After all, if China and India represent a de facto doubling of the global labor force that is driving down real wages globally, it hardly is obvious that the best response is tax cuts tilted towards those already likely to be on the winning side of globalization. And it seems pretty clear that the fast-paced global economy is inconsistent with America's company based system for providing health care to its working population, and, as importantly, to their children.

This is what Roach's said, slightly abridged:

The reforms of globalization shake the social contracts that bind nations together -- leading to recurring clashes between capital, labor, and deeply entrenched political power structures. A globalized world must come up with a new model of the political economy. Germany is struggling mightily with just such a challenge. But it is hardly alone.

Two extremes frame the choices -- the United States with its minimal social contract and Old Europe with its deeply entrenched social welfare state. A couple of numbers say it all: Public sector social expenditures are currently running around 15% of GDP in the US -- well below Europe's 24% share. ...

A superficial assessment of the US model usually boils down to one word -- flexibility. Americans are perceived to be risk-takers -- unafraid to re-invent themselves or their institutions in response to changing circumstances. Possibly the best example of this trait is the painful restructuring of the 1980s -- a direct outgrowth of the economic quagmire of the 1970s. ... At the other end of the spectrum, a superficial take on the European model can also be boiled down to one word -- in this case, rigidity. Europe's deeply ingrained social contract has forced labor market adjustments to occur through the quantity axis rather than through wages. ...

Beneath the surface, the contrasts between these two approaches are even starker. In particular, the American model has taken consumerism to an extreme, with private consumption having averaged 71% of GDP since early 2002. By contrast, the European consumption share is currently around 58%, whereas in Japan, it is only 55%; the Chinese consumption share trails the pack at 42%. Ironically, the excesses of US consumerism have been accompanied by a shift in the shares of national income away from labor and back toward capital. In the US, the worker compensation share fell to a 30-year low of 65% in 2005 whereas "economic corporate profits" currently stand at a near-record 11% share of GDP. By contrast, worker compensation shares are higher elsewhere in the advanced world -- 67% in Japan and 68% in Europe. Not only does America slice the pie differently, it has a very different appetite for eating it as well.

The American paradox of running a consumption-led growth model while tilting the rewards away from labor is a striking testament to the emergence of the Asset Economy. Courtesy of unusually low real interest rates and the wealth effects they have spawned, the US model is also characterized by a profound shortfall of domestic saving and an equally large current-account deficit ... That pretty much sums up the tactical objectives of the global body politic -- providing subsidized interest rates that underwrite the free-wheeling ways of the saving-short, overly-indebted American consumer. "If you buy our goods," goes the logic, "we'll buy your Treasuries."

Interesting remark from Brad's comment section:

There is an inherent problem when a group of nations operate with a common monetary policy but without a common set of labor regulations. A country that liberalizes experiences all the attendant problems but receives only a fraction of the benefits. France is a “free rider” on Germany’s liberalization, without which the ECB would be more likely to tighten, damaging the French as well as the German economy. The US largely avoids the free rider problem by having a strong federal government that can set uniform regulations. (Why doesn’t Europe have a strong federal government? In part because the French rejected the EU constitution. Why does this not surprise me?)

The rich get richer

Harvard and Yale announce another stellar year of endowment returns. Harvard, though, is losing its star manager to a hedge fund -- perhaps due to alumni protests over what some deemed to be exorbitant compensation. In fact, Harvard was getting a great deal. Those guys would have made much more at hedge funds, and probably will ;-)

WSJ: Harvard University, capping a year of controversy over the pay of its investment managers, said its endowment achieved a stellar 19.2% return in the year ended June 30, bringing its value to $25.9 billion.

The report comes as Harvard, by far the richest school in higher education, is looking for a permanent replacement for endowment manager Jack Meyer, who announced in January that he was leaving to start his own firm, taking some of the school's best money managers with him. The results, announced Friday, represent the last of his 15 years at Harvard.

Mr. Meyer, chief executive of Harvard Management Co., the university's in-house money manager, had come under criticism, especially from within the Harvard academic community. Critics questioned the Wall Street-style compensation that he and his lieutenants earned while managing money for the nonprofit university.

In the fiscal year ended June 2004, the two top-paid managers at Harvard Management, David Mittelman and Maurice Samuel, each received about $25 million. Mr. Meyer made $7.2 million. Mr. Meyer had long defended the management company's pay, saying it was necessary to attract top talent.

Harvard has been unusual in managing its money in-house, rather than farming the money out to managers, whose pay would remain undisclosed.

Friday, Harvard said it had named Peter Nadosy, former president of Morgan Stanley Asset Management and a Harvard Management board member, as the endowment's interim chief investment officer, while the school looks for a permanent successor to Mr. Meyer.

Harvard said it plans to commit endowment money to Mr. Meyer's new investment firm, Convexity Capital Management LP, despite calls from critics to sever ties. Mr. Meyer and his assistant didn't return phone calls Friday.

Mr. Meyer and David Swensen, chief investment officer of Yale University, have led the way in moving college endowments away from U.S. stock and bond markets and into more exotic and illiquid investments, such as timber and private ventures that they believe will offer superior returns over time. Harvard said the endowment's strongest results in the most recent year came from private-equity investments.

Harvard Treasurer Jim Rothenberg said the school's investment return beat the 15.8% median return of the 25 largest university endowments, according to preliminary results.

Last year's results bring Harvard endowment's annualized 10-year return to 16.1%, beating the 9.4% return of the median large institutional fund, as measured by the Trust Universe Comparison Service. Had Harvard merely met that return over the past 10 years, Harvard said, the endowment would be $14.4 billion smaller.

But Yale's results have been even stronger. Recently, Yale said its endowment earned a 22.3% return for the year ended June 30, bringing its assets to $15.2 billion.

Sell Sony, buy Samsung II

Could the contrast be greater? Sony announces layoffs of 10k workers, but no dramatic strategy changes. Meanwhile, Samsung announces $33B in future investments in chip plants. Samsung is on a trajectory to surpass Intel as the leader in chip revenues. Admittedly, Intel specializes in CPUs which have higher margins than Samsung's memory chips, but memory is going to be a huge market in the next decade -- think of all the applications, from the iPod Nano, to flash-based video recorders, phones, even laptops without hard drives.

See previous posts here and here.

Businessweek: And if Stringer & Co. needed a reminder that Sony must change fast, they got it five days later. On Sept. 27, Intel Corp. (INTC ) and Microsoft Corp. (MSFT ) threw their support behind a next-generation DVD format from Toshiba (TOSBF ) called HD DVD -- thus delivering a blow to Sony's Blu-ray technology, widely considered technologically superior. Addressing Sony's myriad challenges, Stringer told BusinessWeek: "It's urgent we rectify this situation."

As he looks for inspiration, Stringer might consider taking a page from Samsung Electronics Co. Yes, the two companies have vastly different portfolios, with Samsung earning most of its profits from chips and Sony owning music and movie studios. And it's true that Samsung remade itself only after a near-death experience, following the Asian financial crisis in the late '90s. Still, the Korean company has taken many of the steps that analysts believe Sony needs to take, ranging from collaborating more with partners to doing a better job taking its cues from the market. In doing so, it has become one of the nimblest players in the business. "When Samsung wants to get something done," says Intel Executive Vice-President Sean M. Maloney, "the decision comes down from the top, and everybody moves at lightning-quick speed to just do it."