Bubblicious

Here's a nice comparison of recent bubbles, and a similar graph comparing US to Japanese real estate bubbles. The extension of the green curve on the right of the first graph is a prediction (based on a PIMCO model ;-) of what kind of "mini-bubble" we are headed into with NASDAQ. Black is historical NASDAQ, blue is Nikkei (1980-99) and red is Dow (1919-39). The lower graph shows how the current US property bubble compares to the Japanese bubble of the late 20th century. I've posted a million times on the US real estate bubble, you can just search on "bubble" on the right to find those discussions.





Meanwhile, the long awaited equilibration between manufacturing labor costs here and abroad has begun -- the Times reports a drop of almost 50% in hourly compensation for new workers at Caterpillar (and other midwestern manufacturers) versus what older "grandfathered" workers are making (about $20 per hour including benefits, versus about $40 in the good old pre-globalization days). Equilibration can hurt!

On a related note (via Economistsview), Krugman emphasizes that the main beneficiaries of the new economy are a tiny elite of super-rich -- it's not just manufacturing workers losing out, average white collar compensation is stagnant as well. I'm going to check in with some of my financier friends to see whether they wouldn't mind sharing some of the gains from globalization with me ;-)

So who are the winners from rising inequality? ... A new research paper by Ian Dew-Becker and Robert Gordon ... gives the details. Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only ... about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn't a ticket to big income gains.

But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. No, that's not a misprint. Just to give you a sense of who we're talking about: ... the 99th percentile will correspond to an income of $402,306, and the 99.9th percentile to an income of $1,672,726. The ... 99.99th percentile [is] probably well over $6 million a year. ...

Summers and Shleifer

Apparently there was more to Summers' resignation than politically correct backlash and rejection of his arrogant management style. One of the issues behind the new FAS vote of no confidence was the so-called Shleifer affair. Summers has been protecting Andrei Shleifer, a star economist (John Bates Clark medal winner) and protege, despite a scandal involving Shleifer that cost Harvard over $40M (including legal fees) to settle with the US government. Shleifer remains on the Harvard faculty, despite the well-documented malfeasance.

Strangely, the story was little covered by big media (WSJ, NYTimes), and it took a 25,000 word investigative piece by Institutional Investor (based on court documents including 60 depositions and over 1000 exhibits) to reveal the sordid details of Shleifer's involvement with Russian privatization and misuse of US funds through the Harvard Institute for International Development. I am sure copies of this article have been circulating widely among Harvard faculty. (See here for an amusing account of how a Boston jury was completely unimpressed by Harvard lawyers' narrow technical defense that Shleifer was not bound by conflict of interest rules. The jury took only two hours to decide unanimously against Harvard and Shleifer.)

Then, in quiet contrast, there is the case of economics professor Andrei Shleifer, who in the mid-1990s led a Harvard advisory program in Russia that collapsed in disgrace. In August, after years of litigation, Harvard, Shleifer and others agreed to pay at least $31 million to settle a lawsuit brought by the U.S. government. Harvard had been charged with breach of contract, Shleifer and an associate, Jonathan Hay, with conspiracy to defraud the U.S. government.

Shleifer remains a faculty member in good standing. Colleagues say that is because he is a close longtime friend and collaborator of Summers.

Another amusing Summers anecdote, from the Boston Globe (Ellison, an anthropologist, was Dean of the Graduate School under Summers. Summers, an MIT man, is not exactly what you'd call a smooth diplomat :-)

Over lunch not long after Summers took over the presidency in 2001, Ellison said, Summers suggested that some funds should be moved from a sociology program to the Kennedy School, home to many economists and political scientists. ''President Summers asked me, didn't I agree that, in general, economists are smarter than political scientists, and political scientists are smarter than sociologists?" Ellison said. ''To which I laughed nervously and didn't reply."

Of course, Summers was correct if average GRE scores are any guide ;-)

Fannie Mae redux

I normally don't agree with much that appears on the editorial page of the WSJ, but in this case I do. Fannie Mae execs are guilty of fraud and mismanagement, as discussed in previous posts here and here.

Will Franklin Raines keep his $40M+ in compensation awarded during years when Fannie was violating the law and deliberately misleading investors and the public? I watched the hearings on CSPAN over a year ago and heard Raines and his CFO lying directly to Congress. Will there be consequences?

(Why is a physicist interested in this at all? Because the problem of hedging a portfolio of mortgages is theoretically interesting. Fannie was claiming to have smooth, predictable earnings from a business notorious for causing blow ups for the most sophisticated banks and hedge funds. How were they doing it? Or were they just gambling with taxpayer dollars?)

Fannie's Funny Business

The stock market seemed relieved yesterday when Warren Rudman's 2,652-page report into Fannie Mae's accounting troubles didn't report major new discrepancies in the mortgage giant's books. That news was enough to put the stock up about 2% on the day after a nearly 4% rise Wednesday ahead of the report's release.

And we suppose it is good news of a sort that Fannie Mae's accounting restatement, for which the world has been waiting for more than a year, won't grow from the $10.8 billion figure already estimated. But $10.8 billion is big enough as it is; WorldCom's fraud came to "only" $11 billion. The report's main findings paint the picture of a company that routinely flouted both the rules and law. Some conclusions from the executive summary give a flavor:

• "[M]anagement's accounting practices in virtually all of the areas that we reviewed were not consistent with GAAP, and, in many areas, management was aware of the departures from GAAP" (emphasis added).

• "[E]mployees who occupied critical accounting, financial reporting, and audit functions at the Company were either unqualified for their positions, did not understand their roles, or failed to carry out their roles properly."

• "[T]he information that management provided to the Board of Directors with respect to accounting, financial reporting, and internal audit issues generally was incomplete and, at times, misleading."

• "[T]he Company's accounting systems were grossly inadequate."

The report also identified one case, in 1998, where earnings were manipulated specifically to meet a bonus target. That one instance was a doozy, however; a $199 million amortization expense that went unreported in order to make sure management got its lush payday.

If Fannie Mae were a normal private company, it would be tarred and feathered faster than you can say "Enron." But Fannie Mae is not just another private company. It has a federal charter and an implicit guarantee from the government (read: taxpayers) of its debt. Which makes it all the more vital that Congress reduce the risk that Fannie Mae and Freddie Mac pose to our financial system and the federal fisc.

One of the Rudman report's more worrisome findings was that Fannie's derivatives accounting was wrong because Fannie claimed that its hedges exactly matched its risk exposure when it did not. Fannie has long claimed it is capable of perfectly hedging the interest-rate and prepayment risks in its $800 billion portfolio of mortgage-backed securities. The Rudman report found that that often was not true. But the report only looked at the accounting issues posed by derivatives and hedging, so the public still knows precious little about the extent of the portfolio risk.

The report lets former CEO Franklin Raines off lightly, blaming him mainly for a "culture" that tolerated the accounting abuses. But the core of that culture was a belief that critics -- including us -- could be dismissed and assailed because the company knew it had Congress bought and paid for. And judging by the laughably weak reform that Financial Services Chairman Mike Oxley passed through the House, it still does. If Republicans on Capitol Hill want to know why voters think they've gone native, the failure to rein in Fannie even after a $10.8 billion accounting scandal is Exhibit A.

Harvard's loss

This is why Harvard needed Larry Summers: "He pointed out, for example, that while it was socially unacceptable at a great university to admit that one hadn't read a play by Shakespeare, you could safely joke about not knowing the difference between a gene and a chromosome."

See related post here.

Dark energy and the future of the universe

I just gave this talk at the UO Center for High Energy Physics (PDF slides). I'm giving it as a colloquium at Washington University in St. Louis and the University of Kansas later in the spring, so no peeking if you are from one of those places.

Title: Dark Energy and the Future of the Universe

Abstract: Recent observations of Type Ia supernovae, cosmic microwave background radiation and large scale structure indicate that the expansion rate of the universe is increasing. A number of models describing exotic forms of matter, generically referred to as dark energy (not to be confused with dark matter), have been proposed to explain this acceleration. For example, the dark energy may be due to Einstein's cosmological constant. In this talk I will give an introduction to big bang cosmology and dark energy, with emphasis on the dark energy equation of state and how it determines the future (large time evolution) of the universe.

Voting and Weighing

There is an old saying in finance: in the short run, the market is a voting machine, but in the long run it's a weighing machine.

That is, the price of a stock at any moment might be determined by sentiment, speculation or mania, and wildly divergent from its "real" value, but in the long run it is hard to hide a lack of profits or revenue at a company. (I guess Amazon holds the world's record, still befuddling investors 10 years down the line :-)

You might think science is a weighing machine, with experiments determining which theories survive and which ones perish. Healthy sciences certainly are weighing machines, and the imminence of weighing forces honesty in the voting. However, in particle physics the timescale over which voting is superseded by weighing has become decades -- the length of a person's entire scientific career. We will very likely (barring something amazing at the LHC, like the discovery of mini-black holes) have the first generation of string theorists retiring soon with absolutely no experimental tests of their *lifetime* of work. Nevertheless, some have been lavishly rewarded by the academic market for their contributions.

Valley zeitgeist

Just returned from a visit to RobotGenius world headquarters in Oakland, and a whirlwhind of meetings in the nerve center of the high tech world (Palo Alto, Menlo Park, Mountain View, Woodside).

Some observations... Animal spirits are reviving -- it's not 1999 again but the mood is very positive compared to the last few years. Many VCs are emboldened by recent positive exits in their portfolio companies. The latest ill-defined buzzword is Web 2.0. Wireless (cellphone) security startups have already seen exits. Fear and loathing of Microsoft is being replaced by fear and loathing of Google. Upscale restaurants with $20 lunch entres were packed in Mountain View, and not just by money men (VC density isn't high there, unlike University Ave in Palo Alto), but what appear to be rank and file tech workers. The density of startups in some areas is startling -- every third building seems to house a couple of small tech companies with goofy names. It's strange to see 21st capitalism cheek by jowl with ancient businesses. The JPMorgan Partners office in Woodside is next to a barber shop and a bakery, with its luxe futuristic interior camoflaged by an rickety wood exterior. RobotGenius sits across the street from a tiny Hawaiian barbeque restaurant, a nail salon and an acupuncturist-herbalist. (Our $1 per sq ft rent in Oakland is probably a fraction of JPM's - gotta watch the burn rate :-)

A new culinary phenomena: Indian-Chinese food (that is, Chinese food as served in India, now imported to the Valley at hole in the wall restaurants). Ethnic diversity is striking (esp. relative to Eugene) -- so many Indians and east Asians, not to mention Hispanics and black and white Americans.

Taleb podcast: What do we know?

Here is an excellent talk by Nassim Taleb, hedge fund manager and author of the book Fooled by Randomness, which I highly recommend. Taleb addresses the prediction problem: how do you evaluate your knowledge of the world, other than by testing your ability to make predictions about what will happen next? (Post-diction is too easy - one can always construct post-hoc stories which are consistent with the data. Sorry, historians :-) He then notes that in certain fields like finance, economics and social science, the accuracy of predictions, when carefully studied, is dismal. (See my earlier discussion of Tetlock's research, which confirms this in a quantitative way. Tetlock had to work hard at this, since he looked at softer non-quantitative predictions as in foreign affairs. If you stick to quantitative predictions, like of equity or commodity prices, it is much easier to see that prognosticators are terrible.)

Feynman once said, holding up his fist and rotating it as if it were a charged sphere or something, "Physics is about answering the question: if I do this, what happens next?" I think this is very much in the spirit of Taleb's viewpoint.

One nice experiment Taleb describes shows how overconfident we are in our ability to predict the future.

Ask a group of people to make a prediction -- for example, how many Corollas will Toyota sell next (or last) year? We're not interested in the central values of their predictions. We're more interested in their understanding of its accuracy. So we say, give me a range that covers the 98 percent confidence interval. That is, give me a range of how many Corollas were sold last year, with the real value somewhere in that range at 98 percent confidence. Even if you know nothing about the auto industry, you could incorporate this into your guess by choosing a large range (e.g., between 10,000 and 10 million).

However, people are systematically overconfident in the quality of their predictions - by at least an order of magnitude, says Taleb. Typically, their 98 percent confidence level prediction is more like a 60 percent confidence level prediction. In other words, if you try this experiment with 100 students who correctly understand their own state of knowledge, you would expect only about 2 students to choose ranges which don't include the actual value. Instead, what you find is that 40 or so of the ranges will not contain the correct number! (Their error estimate of 2% is a gross underestimate.)

Taleb claims that the worst performing groups on this kind of exercise (regardless of the prediction requested) are stock analysts and economists, probably because the two groups are selected for a systematic bias toward overconfidence in dealing with noisy data. I wonder how physicists would do? I often stress that in communicating some information to a colleague (e.g., "A neutrino with those properties is ruled out by LEP data"), it is useful to also include a confidence level ("I have thought carefully about the loopholes and have looked at the LEP analysis and am 99% confident what I just said to you is true"). Thus, rather than transmitting a single statement, it is better to transmit the statement plus a confidence estimate. The utility of the pair is dramatically greater than just the statement itself.

My feeling is that when it comes to discussing the implications of a particular experiment, physicists are trained to accurately understand the confidence intervals. However, when it comes to a question like "How likely is it that supersymmetry solves the hierarchy problem?" I suspect we are as overconfident as any other group in the accuracy of our predictions.

Startups for physicists

I gave this talk recently here at U Oregon. There were a lot of graduate students in the audience, which is great. I'm not sure how my colleagues found it though ;-)

PPT Slides (warning, it's a 3 MB file).

Title: Startups for Physicists

Abstract: 20 years ago research and development was concentrated at corporate labs like Bell, IBM, and Xerox PARC. Today, innovation is more likely to be found at small, venture capital backed companies founded by creative risk takers. The odds have never been greater that you, a scientist or engineer, might someday work at (or found!) a startup company. This talk is an introduction to this important and dynamic part of our economy. (Originally presented at the Caltech Entrepreneur's Club.)

Beta release

Help us beta test our product!

We've developed a new way to fight malware (adware, spyware) and clean up infected Windows PCs. Our product is installed at the driver level, between the OS and the hard drive (HD). It builds a "causal" XML database of all HD activity on the machine: object A created B which created C, and so on. You can use this to trace any file back to where it came from. Even, for example, back to the Web site from which it was downloaded -- perhaps without your knowledge via a browser exploit! Our testing indicates that if our product is installed before an infection, we can clean the machine completely with one click. This goes for rootkits as well as ordinary adware.

There is some interesting recursive stuff here -- because we sit between the OS and the HD, we can prevent the bad guys from modifying our code or data.

You can download the free beta version here: www.robotgenius.net

Robot Genius has created a set of tools for securing and managing your PC. Spyberus allows you to monitor all files installed on your machine, and to eliminate any misbehaving or unwanted software. Popup ads and windows can be easily traced to offending malware, and the entire group of infected files deleted in one click! Spyberus is installed in a layer between your Windows operating system and the hard drive itself. Nothing can get onto your drive without going through us.

Trackback and arXiv

arXiv.org, the physics research archive, now allows trackback links to appear on article abstract pages. I often give talks on my research, and I thought it would be nice to use my blog and the trackback functionality to make it easy for readers of the papers to find the PDFs of the corresponding talks. The slides of a talk are sometimes easier to follow than the paper itself!

THERMAL GRAVITY, BLACK HOLES AND COSMOLOGICAL ENTROPY, B. Murray and S. Hsu, hep-th/0512033: Slides of Talk given as ITS seminar by B. Murray.

ENTANGLEMENT ENTROPY, BLACK HOLES AND HOLOGRAPHY, R. Buniy and S. Hsu hep-th/0510021: Slides of Talk given as ITS seminar by S. Hsu.

INSTABILITIES AND THE NULL ENERGY CONDITION, R. Buniy and S. Hsu, hep-th/0502203: Slides of Talk given at Johns Hopkins by S. Hsu.

Let's see if arXiv accepts these trackbacks... Oops, Blogger doesn't support trackback, and arXiv doesn't support manual trackback pings, so it doesn't work right now.

Google is watching

ZDNet have a nice FAQ discussing what user information Google collects, and what they can do with it. Using identifiers like IP address and cookies, they can easily index every search keyword you've used. If you're a gmail user, they can do much more :-) Nope, they don't delete any of this data - remember how cheap storage is these days?

It is only a matter of time before they are forced to reveal this kind of information under court order. Gee, if there were only some easy to use anonymity service to protect us from all this! ;-)

Q: Does Google collect and record people's search terms whether they're logged in or not?
Yes. Google confirmed this week that it keeps and collates these results, which means the company can be forced to divulge them under court order. Whether Google does anything else with them is another issue.

Given the Department of Justice's recent subpoena to Google, it's likely the police or even lawyers in civil cases--divorce attorneys, employers in severance disputes--eventually will demand that Google, Microsoft, Yahoo, AOL, and other search engines cough up users' search histories.

Q: Has this happened before?
Almost. A North Carolina man was found guilty of murder in November in part because he Googled the words "neck," "snap," "break" and "hold" before his wife was killed. But those search terms were found on Robert Petrick's computer, not obtained from Google directly.

Also, attorneys have already begun introducing searches conducted on Google, Yahoo and AltaVista as evidence.

Q: When I use search engines, I type in a lot of search terms I consider private. What does this mean?
We go into all the details below. But the short answer is that when private companies collect reams of data all the time on nearly every American, and the government and curious attorneys can get to that with few obstacles, this becomes a problem. Search engines provide a look into people's personal lives, and privacy awareness has not kept pace.

Q: Aren't there any privacy laws that protect us?
Not really. There is a federal law called the Electronic Communications Privacy Act. But it was enacted in 1986, long before politicians knew about the Internet, and the wording doesn't prevent police and attorneys from targeting search engines.

Politicians wrote that law in a way that is technology-specific--one key part revolves around the meaning of the pre-Internet term "processing services"--instead of adopting a more flexible approach that would grow with technology. Some states may have laws that are more applicable.

Q: Why does Google store that information about me, anyway?
No law requires Google to delete it, and there are some business justifications for keeping it.

For instance, keeping detailed records can help in identifying click fraud (faking clicks on Web ads to drive up a rival's cost), and in optimizing search results for different geographic areas. Compiling a user profile can aid in tailoring search results in products like Google Personalized Search. Also, disk storage is cheap, and engineers tend to prefer to keep data rather than delete it.But it's hardly clear that a compelling reason exists for keeping older records--beyond a few months--unless a customer voluntarily chooses options like personalization.

Q: Does that mean Google has the technical ability to link a person's searches together and divulge them when legally required?
Yes. Google says in its FAQ that it records Internet address, date, time, browser type, operating system and a cookie ID.

Author and entrepreneur John Battelle received word from Google this week that the company can perform two important types of matches. (We confirmed this with Google and followed up with additional questions.)

First, given a number of search terms, Google can produce a list of people (identified by Internet address or cookie) who searched for a given term. Second, given a collection of Internet addresses, Google can produce a list of the terms searched by the user of a given address. That effectively creates an electronic dossier of an individual.

New Yorker Turing profile

A nice overview of Turing's life here in the guise of a review of the new biography by David Leavitt. Not surprisingly, Leavitt's book falls short of the wonderful Alan Turing: The Enigma by Andrew Hodges, himself a mathematical physicist.

Turing's unique contributions enjoy greater appreciation as time goes on. Turing solved a fundamental problem in mathematical logic as a byproduct of conceptualizing the notion of a universal computer, played the single largest role in breaking the German Enigma code (crucial to winning WWII), designed and built one of the first electronic computers, and pioneered the idea of artificial intelligence. It was a terrible tragedy for science that his life ended so early, at age 41.

...But the death of Leibniz’s dream turned out to be the birth of the computer age. The boldest idea to emerge from Turing’s analysis was that of a universal Turing machine: one that, when furnished with the number describing the mechanism of any particular Turing machine, would perfectly mimic its behavior. In effect, the “hardware” of a special-purpose computer could be translated into “software” and then entered like data into the universal machine, where it would be run as a program—the way, for example, the operating system on your laptop treats a word-processing program as data. What Turing had invented, as a by-product of his advance in logic, was the stored-program computer.

Behind the scenes

John Markoff of the Times has the story behind Bush's pro-science and technology message in the State of the Union address. I think I've heard this "doubling in 10 years" claim before with regards to science budgets, so I'll believe it when I see it. For some time now, a good year is one in which funding at NSF or DOE does not decline in real terms.

NYTimes: President Bush's proposal to accelerate spending on basic scientific research came after technology industry executives made the case for such a move in a series of meetings with White House officials, executives involved said Wednesday.

In his State of the Union message Tuesday evening, Mr. Bush called for a doubling within 10 years of the federal commitment to "the most critical basic research programs in the physical sciences."

The president's science adviser, John H. Marburger III, said Mr. Bush would request $910 million for the first year of the research initiative, with a commitment to spending $50 billion over 10 years.

Computer scientists have expressed alarm that federal support for basic research is being eroded by shifts toward applied research and shorter-term financing. But in his speech, Mr. Bush pointed to work in supercomputing, nanotechnology and alternative energy sources — subjects that were favorites in the Clinton administration but had not been priorities for the current White House.

What was different this year, according to a number of Capitol Hill lobbyists and Silicon Valley executives, was support on the issue by Republican corporate executives like Craig R. Barrett, the chairman of Intel, and John Chambers, the chief executive of Cisco Systems.

Industry officials eager to see a greater government commitment to research held a series of discussions with administration officials late last year that culminated in two meetings in the Old Executive Office Building on Dec. 13.

There, a group led by Mr. Barrett and Norman R. Augustine, a former Lockheed Martin chief executive, met with Vice President Dick Cheney. A second group headed by Charles M. Vest, the former president of the Massachusetts Institute of Technology, met with Joshua B. Bolten, director of the Office of Management and Budget.

The industry and science leaders told the officials that the administration needed to respond to concerns laid out in a report by a National Academy of Sciences panel headed by Mr. Augustine. It warned of a rapid erosion in science, technology and education that threatened American economic competitiveness.

The report, "Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future," has been circulating in draft form since October. It was put together by a group of top technology and science leaders, who say the country faces a crisis that the Bush administration is ignoring.

"The gravitas of that group," Dr. Vest said, "has a lot to do with how we got as far as we did."

Still, even after the meetings, the executives and educators were not certain that the administration would respond. So President Bush's proposal on Tuesday night came as something of a surprise.

Albert H. Teich, director of science policy for the American Association for the Advancement of Science, the nation's largest professional organization for scientists, called Mr. Bush's proposal "a breath of fresh air."

"We haven't seen this interest in basic research from this president before," Mr. Teich said. "We in the science community have talked about the state of basic research for quite a while, with its flat or declining budgets, and we are hopeful about this initiative."

Mr. Barrett of Intel, according to people who worked with him, had grown particularly frustrated with the lack of progress on the matter.

In a speech to the National Academy of Engineering in October, in which he described the findings of the Gathering Storm report, Mr. Barrett said: "If you look at the achievement of the average 12th-grade student in math and science, which is of interest to us here, that 12th-grader in the U.S. ranks in the bottom 10 percent among their international peers. I think it is incumbent upon all of us to look at that report and help raise our voices collectively to our local officials, state officials and national officials."

The executives said that the administration had also been induced to respond by a growing bipartisan movement in Congress supporting basic research and education.

Two bills tackling this matter have recently been introduced. One is the Protect America's Competitive Edge Act, by Senators Pete V. Domenici, Republican of New Mexico; Jeff Bingaman, Democrat of New Mexico; Lamar Alexander, Republican of Tennessee; and Barbara A. Mikulski, Democrat of Maryland. A similar bill was introduced by Senator Joseph I. Lieberman, Democrat of Connecticut. Several of the senators met with President Bush in December to encourage him to support the competitiveness legislation.

"We're excited the president has jump-started this and that it is very bipartisan," Dr. Vest said.

Now the technologists and the educators are waiting to see the specifics of the financing when the president's budget is introduced next week. The report had called for an annual 10 percent increase over the next 10 years, and several executives said they now expected a rise of 7 percent annually, putting annual spending around twice the current level in 10 years.

Peter A. Freeman, the National Science Foundation's assistant director for computer and information science and engineering, said the president's initiative would make a big difference.

"We're obviously not at liberty to say what will be in the president's budget next week," Mr. Freeman said, "but we're very hopeful based on the State of the Union address. This is a strong sign that this administration will continue to be very supportive of fundamental science and engineering."

Despite there being little detail yet with precise figures, even those who had been publicly critical of the administration were enthusiastic.

"This is really a huge deal and I'm very encouraged," said David A. Patterson, a computer scientist at the University of California, Berkeley, who is president of the Association for Computing Machinery, a professional group.

At the same time, though, Mr. Patterson was concerned that the president's proposal to double funds for basic research drew little applause from the Congressional audience on Tuesday night. "It just shows the challenge we have," he said. "It wasn't obvious to the legislators."

Pinker pulls no punches

From the Edge.org Web site. It will be a good sign for science if Pinker isn't burned in effigy like Larry Summers. I imagine in some quarters he is already the bogey man of the 21st century.

Groups of people may differ genetically in their average talents and temperaments

The year 2005 saw several public appearances of what will I predict will become the dangerous idea of the next decade: that groups of people may differ genetically in their average talents and temperaments.

In January, Harvard president Larry Summers caused a firestorm when he cited research showing that women and men have non-identical statistical distributions of cognitive abilities and life priorities.

In March, developmental biologist Armand Leroi published an op-ed in the New York Times rebutting the conventional wisdom that race does not exist. (The conventional wisdom is coming to be known as Lewontin's Fallacy: that because most genes may be found in all human groups, the groups don't differ at all. But patterns of correlation among genes do differ between groups, and different clusters of correlated genes correspond well to the major races labeled by common sense. )

In June, the Times reported a forthcoming study by physicist Greg Cochran, anthropologist Jason Hardy, and population geneticist Henry Harpending proposing that Ashkenazi Jews have been biologically selected for high intelligence, and that their well-documented genetic diseases are a by-product of this evolutionary history.

In September, political scientist Charles Murray published an article in Commentary reiterating his argument from The Bell Curve that average racial differences in intelligence are intractable and partly genetic.

Whether or not these hypotheses hold up (the evidence for gender differences is reasonably good, for ethnic and racial differences much less so), they are widely perceived to be dangerous. Summers was subjected to months of vilification, and proponents of ethnic and racial differences in the past have been targets of censorship, violence, and comparisons to Nazis. Large swaths of the intellectual landscape have been reengineered to try to rule these hypotheses out a priori (race does not exist, intelligence does not exist, the mind is a blank slate inscribed by parents). The underlying fear, that reports of group differences will fuel bigotry, is not, of course, groundless.

The intellectual tools to defuse the danger are available. "Is" does not imply "ought. " Group differences, when they exist, pertain to the average or variance of a statistical distribution, rather than to individual men and women. Political equality is a commitment to universal human rights, and to policies that treat people as individuals rather than representatives of groups; it is not an empirical claim that all groups are indistinguishable. Yet many commentators seem unwilling to grasp these points, to say nothing of the wider world community.

Advances in genetics and genomics will soon provide the ability to test hypotheses about group differences rigorously. Perhaps geneticists will forbear performing these tests, but one shouldn't count on it. The tests could very well emerge as by-products of research in biomedicine, genealogy, and deep history which no one wants to stop.

The human genomic revolution has spawned an enormous amount of commentary about the possible perils of cloning and human genetic enhancement. I suspect that these are red herrings. When people realize that cloning is just forgoing a genetically mixed child for a twin of one parent, and is not the resurrection of the soul or a source of replacement organs, no one will want to do it. Likewise, when they realize that most genes have costs as well as benefits (they may raise a child's IQ but also predispose him to genetic disease), "designer babies" will lose whatever appeal they have. But the prospect of genetic tests of group differences in psychological traits is both more likely and more incendiary, and is one that the current intellectual community is ill-equipped to deal with.

The point about costs associated with benefits from certain genes is a bit off the mark. Even if it is so, there are still desirable combinations of genes, just as there are some people who are above average over a broad range of abilities. (Or, some parents will accept associated problems in order for their child to be the next Michael Jordan or Einstein.) I would be surprised if market-driven technologies did not arise to satisfy the demand for genetic engineering.

Chinese exceptionalism

Thanks to Brad Setser for recommending the following paper by economist Dani Rodrik, which describes how China's economy is quite atypical of a developing country at its income level. Setser adds that it is quite unusual for a developing country to expend 10% of GDP each year intervening in FX markets to keep its currency cheap. All this sounds like an argument that the RMB is undervalued...

NewEconomist: In a new paper, Harvard's Dani Rodrik asks What's So Special About China's Exports? (PDF) The short answer is that "China is exporting stuff that is way too sophisticated for its level of income, and that explains part of its success". Here's the longer version:

..what is so special about China’s exports is not that they are voluminous or that its large pool of labor gives it a huge labor cost advantage. What stands out is that China sells products that are associated with a productivity level that is much higher than a country at China’s level of income. This helps account both for why China’s trade is viewed as problematic in advanced countries, and for China’s rapid economic growth.

The economically relevant question for sustainability is not whether trade-GDP can keep on rising, but whether China will manage to latch on to higher- and higher-income products over time, and continue to fuel its growth thereby.

Rodrik is sceptical that China can manage it; if not, "this is something that is likely to slow down growth." He concludes by discussing the nature of future industrial policies:

A clear implication of this paper is that China’s industrial policies - however incoherent they may have been - have had a hand in China’s past success. Future economic performance may also need to be supported by such policies.

...Therefore, a key question for China going forward is whether Chinese policies will maintain their experimental and flexible nature - whether governments will remain willing to support new industries but also willing to turn against ventures that under-perform. Designing the appropriate institutional structure to foster such an experimental, carrot-and-stick approach to industrial policy is an important challenge facing Chinese policy makers. This is an area where institutional transplantation does not work very well.

...The challenge for China therefore is to develop institutional models that are based on Chinese realities.

More podcasts

Sorry for the lack of posts -- I'm being slowly crushed down by two babies, a startup and physics research!

Here are more podcast recommendations. The first two are hilarious, despite the serious topics!

Evolutionary theorist Robert Trivers (previously profiled here) discusses the evolution of deceit and self-deception. It's plausible to me that the ability to decieve yourself is adaptive -- it makes it easier to lie convincingly, vilify your enemies, justify your actions, etc.

Trilogy co-founder and CEO Joe Liemandt describes how he dropped out of Stanford and ran up hundreds of thousands of dollars in credit card debt to start his company. Although it's a big, well-known software company, I never knew what Trilogy actually did until I listened to this podcast. Their original product was a "configurator" which solved very complicated constraints (i.e., compatibility of components) faced by computer manufacturers like Silicon Graphics, HP and IBM. Nowadays Liemandt describes their software as performing constrained, object-oriented database search. He conveys just how tough and exhilarating it is to start a company.

Mark Zuckerberg, who dropped out of Harvard to start TheFaceBook, strikes me as a naturally talented entrepreneur, despite his youth (he is still in his early twenties). With over 5 million users (many of them obsessive), TheFaceBook is set to surpass Google in number of pageviews per day! Given the positive network effects for social software, and the fact that at many schools something like 80+ percent of students already use TheFaceBook, I don't see how competitors will ever displace these guys.

Outsourcing CS homework?

Those creative, enterprising Americans are at it again! They've outsourced boring, low value-added tasks like learning C++ to foreigners! Thanks to yankee ingenuity we'll grow our GDP through real cutting edge innovation, like organizing raves or inventing new ways to dispense shots. Who needs all that math anyway? :-)

WSJ: ...But what the computer-programming student who goes by the handle "Lover Of Nightlife" did last month, as the fall semester raced to a close, could only have happened in the age of the Internet: He went online to outsource his predicament.

"This is homework I did not have time to study for," he said in a message on a Web site devoted to outsourcing computer projects. "I need you guys to help me."

Attached was a take-home final exam for a computer class that Mr. Nightlife Lover wanted to pay someone else -- presumably, someone from a place where people can't afford a lot of night life to begin with -- to take for him.

This bit of commerce took place on Rentacoder.com, a Web site that has been mentioned before in this column as an example of globalization in all its blood-curdling efficiency. Rent A Coder enables people -- usually Americans -- who need computer programs to put them out to bid -- usually for cut-throat prices by Indians and Eastern Europeans.

But if U.S. companies can go online to outsource their programming, why can't U.S. computer students outsource their homework -- which, after all, often involves writing sample programs? Scruples aside, no reason at all. Search for "homework" in the data base of Rent A Coder projects, and you get 1,000 hits. (An impressive number, but still a tiny fraction of all computer students, the vast majority of whom are no doubt an honest and hardworking lot.)

A few examples: "I need a simple console-based program and a PHP script written that uses the openssl library." "I need 2 algorithms filtering -- median and Gaussian." "A C++ program that will implement a billing system using threads. Needs to be completed tonight if possible."

Indeed, some programming students appear to be outsourcing their way through college. "Pascal Rookie," from Colorado Springs, Colo., has put five school projects to bid. And while he may be a plagiarist, at least he treats his helpers well: Mr. Rookie has received the highest marks possible for a buyer in the eBay-like rating system used by Rent A Coder. "A pleasure to work with him," said one.

You can't tell from the site how much was paid for the help, but usually it's well less than $100.

Math rules!

Says the cover of BusinessWeek. It's a pretty lightweight article (see the amusing graphic How much math do you need to know?), but in all seriousness I do believe the economic returns to mathematical ability are going up and up. Yet, oddly, salaries of scientists have been stagnant in real terms over the last decade. (See also here.)

Prediction markets and the LHC

We're nearing a new era in particle physics, when the Large Hadron Collider (LHC) at CERN begins operation, and hopefully we'll finally discover the mechanism by which spontaneous symmetry breaking occurs in the electroweak theory. The vacuum state of our universe chooses a direction in the SU(2) x U(1) gauge space, thereby making the W and Z bosons heavy, and giving masses to spin-1/2 particles like the electron. We've been waiting for decades now to understand the detailed dynamics by which this occurs. Had the US SuperCollider project not been terminated in the early 1990's, we would have known the answer back in the 20th century. Now our hopes rest on a less powerful machine in Geneva.

In an earlier post I noted the inability of "experts" in certain fields (economics, political science, foreign affairs) to predict the future. They barely outperform monkeys throwing darts, and do not outperform well-informed lay people in their predictions. Can particle theorists do better? Over the years, theorists have expended an incredible number of high IQ person-hours investigating certain models of electroweak symmetry breaking (ranging from supersymmetry, to strong QCD-like interactions, to extra dimensions, etc.). These are more or less mutually exclusive possibilities, so it will turn out that much (if not most) of the time spent will have been completely wasted once the dust settles and the data tells us how Nature really works. (You might argue that time spent on exploring a speculative particle physics model is not wasted, even if the model fails to describe reality, and I might accept that point of view for the 10 or 100 best papers written on a particular model or idea, but not for the 1000th!)

I propose that we set up a prediction market where theorists can put their money (inevitably, small sums :-) where their mouths are. In a prediction market one trades outcome contracts which pay off a fixed amount (say, one dollar) in the event that the outcome matches reality (Kerry wins 2004 election, superpartner to gluon discovered with mass less than 100 GeV, etc.). If the set of contracts is exhaustive -- constructed to cover all possibilities (in our case, there may have to be a "none of the above" contract), the prices of each contract will reflect the probability that the community collectively assigns to a given outcome. It would be very interesting to see if this market does a good job of predicting the future, or if proud particle theorists are just as subject to the madness of crowds as stock and real estate speculators.

We might get the Iowa Electronic Markets to help us with this.

Barry Diller interview

Nice podcast of an interview with former media mogul (now Internet mogul) Barry Diller. Diller recently added Ask Jeeves (which bought its search technology from Teoma) to his list of Internet properties, which includes Match and Expedia. Diller reasons very cogently about risk taking and business strategy, and seems to have a much firmer grasp of where Internet technologies are heading than most media-industry transplants. His description of the assumptions behind the Ask acquisition, and of his partnership with Rupert Murdoch in FoxTV are both revealing. I don't agree with everything he says (he's quite negative about the prospects for user-generated content, and overconfident about the efficiency of talent-filtering in our current system), but it is definitely worth a listen. It amuses me greatly that Diller has a better intuitive grasp of the term speculative than many researchers (string theorists) in my field :-) He refers to the $2.6 billion Skype acquisition using that term, as well other recent transactions.

Greenspan gets it, will Bernanke?

Greenspan seems to grasp the effect of globalization on US wages and inflation.

WSJ: Buried in the minutes of the Federal Reserve's Dec. 13 policy meeting, released last week, was this bland observation: Fed officials "noted that robust competition -- including from foreign producers...[was] helping to contain cost and price pressures."

Markets largely ignored the sentence, but it's one of the most important factors guiding Fed Chairman Alan Greenspan in his final weeks at the helm of the nation's central bank. Mr. Greenspan has marveled at how inflation and wage growth have stayed low even as the economy continues to grow robustly and the jobless rate falls below 5%, a level that has often driven up wages and prices. Searching for an explanation, he has hit on globalization.

If the Fed thinks growing imports, outsourcing and international investment are holding a lid on wages and prices, then interest rates can be lower than they otherwise would. Indeed, as the minutes show, this is one reason the Fed seems to think it can stop raising rates soon. Of course, there is no guarantee Ben Bernanke, nominated to succeed Mr. Greenspan, will be guided by the same sentiments.

...Now, with productivity growth leveling off and unemployment declining, Mr. Greenspan has fingered globalization as the missing variable that explains why inflation is so low. He began this avenue of inquiry in 2003 when he was trying to understand how U.S. trade deficits, which must be financed by borrowing overseas, could keep growing with no upward pressure on U.S. interest rates and little downward pressure on the dollar. His conclusion was that the U.S. can run large deficits with its trading partners because investors have become less sensitive to international borders in deciding where to put their money.

Last year, he expanded the explanatory power of globalization to include its influence on inflation and wages. The integration of the former Soviet Union, China and India into world markets would "approximately double the overall supply of labor," he told Congress, and prove a major contributor to "the disinflationary pressures that have been evident in the global economy."

...Often the mere threat that production may move offshore is enough to trigger wage concessions. Auto-parts supplier Delphi Corp., now in bankruptcy protection, has asked for steep wage and benefit cuts from its workers to meet customer demands that it match the prices of low-cost foreign suppliers. Several academic researchers say this "threat effect" has depressed wages and increased inequality in numerous countries, both rich and poor.

Better than the yield curve?

A yield curve inversion has often been an indicator of recession. However, talk is abundant that "this time it's different" -- long yields are low because of foreign central bank buying, not because the market is predicting recession.

Bill Gross of PIMCO touts a better indicator than the yield curve. He compares time-averaged (say, 5 year duration) rates to short term rates, in contrast with the instantaneous values plotted on the yield curve. It appears this indicator has been more reliable in the past, and is currently predicting an economic slowdown and a bull market for bonds.

This 5-year swap concept is important because the U.S. economy operates in much the same way. With close to a 5-year average life, the entire U.S. bond market can be compared to a 5-year fixed swap. That means that companies, homeowners, and consumers that have borrowed money in recent years – (and purchased assets such as a home that are akin in my example to a 5-year swap) – are now being squeezed in a flat yield curve environment. Visualize a real life example in which you have “financed” a home with an adjustable rate mortgage (in my example you finance a 5-year swap with floating 3-month Libor). As the cost of the ARM increases with higher short rates, your excess income available to spend on discretionary items begins to shrink. If that ARM rate goes too high, you hunker down even more by not eating out, going to movies, or taking a vacation to exotic destinations. The economy in other words slows down. How does this translate into a bond market timing tool? Chart I shows but one of a series of graphs PIMCO uses to indicate when enough is enough – the point at which adjustable short rates rise sufficiently to make the owner of a home or a 5-year swap, or more importantly the economy, cry “no más!” That point comes in this example when Fed Funds rise to meet the average cost of intermediate Treasury financing issued over the past 5 years and the spread between the two disappears.

For sophisticates, please note that this is not the same thing as a flat yield curve. A flat yield curve is a concept comparing current short rates to current 5- and 10-year rates. What my chart does is to compare current short rates to the Treasury’s average intermediate term “coupon,” a more reliable and indicative indicator of economic pain or restrictiveness since it uses an average embedded cost of debt concept instead of a current cost. The standard flatness as measured by current market rates in early 1995 (not shown here) never led to a recession, only a slowdown, just as Chart I would have indicated. In other words, this indicator called for a mild slowdown in 1995which is what we got. The standard flat curve theory called for something more extreme which is something we never got. The embedded cost of debt indicator, therefore, shown in Chart I, has been more reliable.

...yields have peaked in the bond market and will soon peak in Fed Funds producing an economic slow-down in 2006. If the Fed goes beyond 41⁄2% and inverts the yield curve, the possibility of recession will increase. Observant readers will have already noted that the current data point in Chart I is not only calling for an end to the bear bond market, but a recession at some point 12-18 months hence. Perhaps. Much will depend on the future condition of the U.S. housing market and of course global economies – primarily of the Asian variety.

Speculative flows, the yuan and deflation in China

This Times article suggests that speculative currency flows into yuan have dropped off drastically as hopes of a significant near-term revaluation have faded. Particularly interesting is the claim that the inflationary forces felt recently in China were more due to "hot money" from outside rather than overheating of the economy. With growth rates in the 10% range there are few signs of inflation now.

...Hundreds of billions of dollars have flowed into China in recent years, driving the country's total reserves beyond Japan's, to $860 billion. But this fall, only half as much money flowed into China as a year earlier.

Investors in the once red-hot Shanghai property market are walking away, and currency speculators who had bet that China would sharply strengthen the yuan have pulled back as it became clear that the authorities favor a slow approach to currency appreciation.

The flow of money has diminished even with the rise in the Chinese trade surplus, which has tripled in the last year to the irritation of politicians and business executives from Washington to Brussels to Tokyo. They want Chinese officials to let the yuan rise faster to make the country's exports more expensive in foreign markets.

In July, authorities revalued the yuan only slightly after trading partners complained that its link to the dollar kept exports cheaper than they would otherwise be. That, combined with very low interest rates, damped investment enthusiasm.

The slowing of speculative investments "takes the pressure off" Chinese authorities to allow appreciation, said William Belchere, chief Asia economist at Macquarie Securities here.

The reduced speculation has brought measurable advantages as well: inflation has almost disappeared, even as the economy grew at a 9.8 percent rate last year. Economists attribute this in part to dwindling amounts of speculative money sloshing around the economy.

China has also enjoyed excellent harvests, and there has been so much investment in new factories that a recent government report estimated that three-quarters of all categories of manufactured goods suffered from oversupply.

"There's no pricing capacity for anything," said Jing Ulrich, a J. P. Morgan economist here. "Food prices are falling," she said, and those for manufactured goods "are seeing stagnation at best."

...The central bank said late Tuesday that it wanted to keep the yuan's exchange rate "basically stable at an adaptive and equilibrium level." It added that big fluctuations "will adversely affect China's economic and financial stability and undermine China's fundamental interests."

Qu Hongbin, a senior economist at HSBC, said speculators had expressed disappointment that China did not let the yuan rise more in July and was keeping short-term interest rates at half the levels in the United States. Speculative inflows have virtually disappeared as a result.

Japan chipmakers: industrial policy gone bad

Proponents of industrial policy should have a careful look at the chip industry in Japan for an example of how badly wrong things can turn out. In the 80's the US formed an industry-government consortium called Sematech to combat what seemed to be an unstoppable Japanese juggernaut. The semiconductor industry was given as a prime example where the US had dropped the ball and where Japanese industrial policy, formulated by MITI, would lead to domination of yet another market. Now, Samsung alone spends more on chip R&D and infrastructure than all of Japan combined!

That the NEC President could say "It's a big risk to limit yourself to a small number of products. Those have to be very strong products," shows the enormous gulf between Japanese corporate thinking and the competitive and entrepreneurial spirit we have here. Innovative companies here are often one (or few) product companies. If your product isn't strong, why are you in that market in the first place?

Choosing technology winners and losers is probably not an area in which government will outperform the market. Is a bureaucrat going to do a better job than entrepreneurs, VCs and big company CEOs with skin in the game? We're better off putting our resources into basic science (the underlying infrastructure for technological advances) and science and engineering education.

NYTimes:
In the late 1980's, Japan dominated the global computer chip industry, overtaking the United States in what was seen as a symbol of American economic decline and Japanese ascendance.

Those roles have been reversed. Japan's global market share is now half of what it was then, while Intel of Santa Clara, Calif., has risen to become the world's largest and most profitable chip maker. Indeed, Intel and Samsung Electronics, a South Korean company that was not even in the picture in Japan's glory days, together have a market share as large as the combined shares of the 20 large Japanese chip makers tracked by the research firm iSuppli.

Japanese chip makers are trying to snap out of this decline by joining forces, either by sharing factory construction costs or through outright mergers. The latest move came Dec. 28, when the Japanese chip makers Hitachi, Toshiba and Renesas Technology announced they were in talks to jointly build a semiconductor factory, a project that would be backed by the government. The media has called the plant the Rising Sun chip factory, after Japan's flag.

Efforts to combine forces have failed in the past: a wave of mergers two years ago produced companies as unprofitable as their predecessors.

At their height in 1988, Japanese companies produced 51 percent of the world's semiconductors, and the top three chip makers by market share - NEC, Toshiba and Hitachi - were all Japanese. Now, Japanese companies have a combined share of 23.4 percent of the $237.3 billion global semiconductor market, according to iSuppli. Just three Japanese companies made the Top 10.

"This has been a lost decade and a half for Japanese semiconductor companies," said Yoshiharu Izumi, an analyst at J. P. Morgan Securities. "Japan has been caught between the United States and Asia, and this middle ground keeps shrinking."

The chip makers' woes have spurred much soul-searching in Japan, where the industry had been a source of national pride. But analysts say an intense sense of national mission in Japan's chip industry has been one cause of its undoing.

For years, chip makers helped the country's export machine by supplying consumer electronics companies with every type of semiconductor imaginable, often at little regard for profits. Much of this was done in-house, as many of today's chip companies started life as divisions of Japanese electronics giants.

Chip sales rose while Japan's consumer electronics were globally dominant, but plunged when the world started buying cheaper televisions, laptop computers and other products made elsewhere in Asia. As losses mounted, many Japanese electronics companies could no longer afford their chip operations and spun them off as separate companies. These new companies lacked the cash to keep pace with the billions of dollars that rivals like Intel and Samsung were spending on new factories and production lines.

Now, many analysts here say, the only way the industry can save itself is by learning from American chip makers like Intel and Texas Instruments, which reinvented themselves two decades ago in response to Japan's strength. These United States companies succeeded by building strong overseas sales networks and concentrating their resources on a small number of products that they made well. Intel focused on building microprocessors, the brains of personal computers, and now dominates the global market. Texas Instruments specialized in chips used in cellphones.

"In the 1980's, the United States figured out a new business strategy," said Toshio Nakajima, president of NEC Electronics, the chip subsidiary of the Japanese electronics giant NEC. NEC fell from being the world's largest chip maker in 1988 to the 10th-largest today. "It is remarkable how these American companies learned to compete."

Mr. Nakajima said his company might eventually focus production on just three types of chips, though it had not decided which three. "It's a big risk to limit yourself to a small number of products. Those have to be very strong products," he said.

Toshiba is doing well focusing production on a specialized product, advanced NAND flash memory chips that are used in digital cameras and music players like the Apple iPod. Toshiba's chip revenues are expected to have grown a healthy 7 percent in 2005, according to iSuppli. (Like most companies, Toshiba does not break out its chip sales figures.)

The picture is not so rosy for the rest of Japan's industry. Of the 20 Japanese chip makers tracked by iSuppli, 12 are expected to report reduced revenues in 2005, including NEC Electronics and Renesas, which was created by the 2003 merger of the chip operations of Hitachi and Mitsubishi Electric.

The Japanese chip makers' problems are not the result of a lack of technology but an overdependence on their home market. Even the three biggest chip makers - Toshiba, Renesas and NEC - still sell about 60 percent of their chips within Japan, according to the Ministry of Economy, Trade and Industry. By contrast, Intel, Samsung and Texas Instruments do about 80 percent of their business outside their home countries.

Another problem is high costs, partly because of outdated and inefficient factories. As sales fell, companies had to cut back on buying new facilities and equipment. In 2002, such spending by all Japanese chip makers totaled 266 billion yen (about $2.3 billion), a third of its level in 1989, according to J. P. Morgan. It is now back up to 741 billion yen ($6.3 billion), still barely enough to keep pace with the $33 billion that Samsung alone plans to spend over the next six years to build nine new semiconductor production lines.

Japan's powerful bureaucrats, who originally helped guide the industry to preeminence, have been urging companies to pool money and technology, with limited success. They originally pressed the largest half-dozen companies to cooperate in building the Rising Sun semiconductor factory, which could cost as much as $3 billion. But the effort was delayed for years as companies failed to agree on what kind of chips Japan should focus its resources on. In the end, just three companies announced that they would join the project.

"Japanese companies have been looking hard for a winning strategy," said Tatsuya Fujiwara, deputy director in charge of the semiconductor industry at the Ministry of Economy, Trade and Industry. "They still haven't found one yet."