Business & Economics: November 2009 Archives

C. Edmund Wright makes an excellent analogy to explain why government officials aren't qualified to run the economy:

Can Barney Frank Dunk on Lebron? No, he cannot. Nor can anyone else in Washington. Nor can they catch passes from Ben Rothlisberger in the Super Bowl or strike out Derek Jeter in the World Series. They are not equipped to do so.

So what?

This ridiculous image speaks to the business malaise infecting the economy since Obama took office. The point is that politicians are equally ill-equipped to run the auto industry or the health industry or the lending industry or the insurance industry -- and their determination to do so is sucking all the dynamism from the entrepreneurial class in this country.

It's called hubris, and on the part of our leaders it will lead -- as it always does -- to tragedy. People need to know their limits, and in my experience the greatest part of humility is recognizing that everything wouldn't necessarily be "better" if I just had more power over you.

Are you a stock or a bond?

Human capital is a measure of the present value of your client’s future wages, income and salary (net of any future income taxes and expenses). For example, if she is a doctor, lawyer, engineer or even a professor, she has probably invested an enormous amount of time, effort and money to finance her education. That investment will hopefully pay off over many future years of productive labour income in the form of job dividends over the next 10, 20 or even 30 years. Sure, clients can’t really touch, feel or see human capital, but like an oil reserve deep under the sands of Alberta, it will eventually be extracted and so it’s definitely worth something now. ...

Your human capital can be viewed as a hedge against the losses in your financial capital. So, as a 50-, 40-, or especially 30-year old, you should be willing to take more chances with your total portfolio, perhaps even borrow to invest or leverage into the stock market, because you have the ability to mine more human capital if needed.

I'm sorta both (my job is fairly secure, but I'm also a bit entrepreneurial), but time-wise I spend most of my time as a bond. I have taken this into consideration as I have designed my investment portfolio, and definitely take more risks that I would if I were self-employed.

(HT: My Money Blog.)

I interviewed with Google, but I stopped returning their calls after the second interview because I thought their interview process was dumb. I don't think they would have hired me anyway, because I didn't really conceal my frustration with their questions. Nightmare Google interviews appear to be common, which begs the question: why?

“Estimate the number of students who are college seniors, attend four-year schools, and graduate with a job in the United States every year.” This time I remained poised.

“There are about 300 million people in the nation” I began. “Let’s say 10 million of those are college students at four year schools. Only ¼ of those 10 million are seniors, so that would be roughly 2-3 million. If half of those students graduate with jobs, you’re looking at about 1.5 million kids.”

“Would you say that number seems high, low, or just about right?”

“I would say it sounds low, but maybe that’s because I’m going through the job-search process and I’m wishing the number was higher.”

I didn’t even get a sympathetic laugh. “That’s all. Good luck with your job search.” The phone clicked-- I was stunned. The abrupt sign-off was a clear indication that I wouldn’t be considered for round 2.

In my own case, I was asked to provide compilable C++ code over the phone to the interviewer. The interviewer said I could use a pen and paper to write it out before reading it to him, but was flummoxed when I told him that that wouldn't be possible. I was interviewing for Google from the workplace of my then-current job, and I was on my cell phone outside because I couldn't very easily do that from my cubicle. I asked if I could give him pseudocode, but apparently he had to type my response into an actual compiler to verify my coding ability. Then we got into an argument about how to implement a merge sort. Then the interviewer tried to convince me that the correct answer to a question he asked was to use a quick sort algorithm because it's faster than merge sort. Of course quick sort is not faster than merge sort in a worse-case scenario, which I tried to explain, to no avail.

At this point I suggested that we move on to the next question, but the interviewer would not do so until I verbally related some compilable C++ code for my preferred sorting algorithm. I did my best, but I highly doubt that whatever I told him would compile and successfully execute a merge sort. After this we did move on, but I could tell that the interviewer was as frustrated as I was, and the rest of the conversation was tense.

So, why does Google interview this way? Sure, they want to restrict their hiring to smart people who are likely to fit in with their corporate culture, but what company doesn't want that? Most companies, however, couldn't get away with interview questions like these because they aren't in Google's enviable top-of-the-heap position. Google interviews the way it does for two reasons: because it can get away with it, and to feed the egos of employees. It's not clear to me that this interview style actually contributes to business performance, but it certainly does not eliminate the possibility of future comeuppance. When Google tumbles off the top of the heap, you can be sure that their interview style will find some humility.

Too bad this kid will one day learn that her parents bartered custody of her for sculptures.

Udo Fritz-Hermann Brandhorst, an heir to Germany’s Henkel AG & Co. fortune and a major art collector, avoided a public court case in New York by settling a lawsuit filed by his former mistress involving two Damien Hirst sculptures and a custody dispute.

The settlement was reached Sunday night according to the woman, Venetia Kapernekas, and Brandhorst’s lawyers.

Kapernekas, a 49-year-old New York art dealer filed a suit in federal court in Manhattan claiming an interest in the two Hirsts, which have been valued at an estimated $47.6 million, court documents show. The custody suit, involving their 8-year- old daughter, was being heard in New York County Family Court.

Kapernekas has agreed to drop the federal suit and claims on the Hirsts in exchange for: custody of their daughter (Brandhorst gets visitation and vacation rights); a one-time payment of $100,000; a $500,000 trust for the daughter’s education; a loft on Wooster Street in Manhattan’s Soho district valued at about $5 million to be held in the daughter’s name as sole owner; $5,000 a month in child support; and $640,000 to cover Kapernekas’s legal expenses, according to Kapernekas.

Sad, but maybe the sculptures were simply being used as leverage to provide for the daughter's future?

(HT: Marginal Revolution, Felix Salmon.)

Eamon Javers asks a contrarian question: "Is China headed toward collapse?".

Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.

First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”

Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth. ...

This, Chanos and others argue, is happening in sector after sector in the Chinese economy. And that means the Chinese are in danger of producing huge quantities of goods and products that they will be unable to sell.

So how to hedge against China's failure?

Google Voice is facing a probe by the Federal Communications Commission because it bypasses legacy telecom regulations by arguing that it is a software company, not a communications company. The end result is that users save money and parasitic telephone companies lose government-protected revenue.

A group of Republicans and Democrats in the U.S. House of Representatives called on the Federal Communications Commission to investigate Google Inc's ability to block calls to rural telephone exchanges ...

Citing media reports, AT&T has said the Google Voice service was blocking costly calls to phone numbers in certain rural areas in order to cut down on expenses. Phone companies are banned from blocking calls. ...

In 2007, the FCC told carriers they could not restrict calls to avoid fees associated with adult chat lines or free conference calls by companies routing calls through rural carriers in order to generate fees.

Here's how it works:

1. Rural phone carriers are allowed by the FCC to charge higher rates to other phone companies for call that go through their network. These higher rates are allowed because without them it might not be possible to operate phone services in areas with low population density.

2. Phone sex companies set up in rural areas and make revenue-sharing agreements with rural phone companies so they can split the high fees. (Of course the high fees wouldn't be needed to support the rural phone companies if the phone sex call volume were taken into account, but the high rate rules have existed for decades and will never be revisited.)

3. Legislators from rural areas get campaign contributions from rural phone companies, so they will fight to protect the high rate phone sex scam in order to protect these contributions.

Google provides Voice for free and realized that a high percentage of its cost was arising from a small number of calls that were being routed through these rural phone companies, so they decided to block the calls to eliminate the fees. FCC regulations prohibit telecommunication companies from blocking any calls, but Google argues that it isn't a telecommunications company, isn't offering phone service, and is not subject to FCC regulation.

The spat prompted an attorney for some rural carriers, Ross Buntrock, to file a letter on October 1 with the FCC to complain that AT&T is refusing to pay its bills to rural carriers.

"The only difference between Google's alleged call blocking and AT&T's refusal to pay terminating access charges for conference and chat-line calls is that the (local carriers) are forced to incur the costs of terminating AT&T's customers' traffic," Buntrock wrote.

A Google spokesperson said on Thursday that for AT&T to invoke rural America while AT&T is behind in its payments to rural carriers is "the height of cynicism."

AT&T isn't paying the fees either, which provides additional support for the obvious conclusion: the special high rates these rural phone companies are allowed to charge should be eliminated. The regulations intended to ensure that rural residents have phone service available have been corrupted to enrich rent-seekers, as most government regulations are. Let's deregulate, eliminate the parasites, and let the free market sort it out.