Michael Lewis on California

I always like reading Michael Lewis' stuff. Here's a nice piece on the fiscal problems of California:

“The recall happens and people are asking me [Arnold Schwarzenegger], ‘What are you going to do?’ ” he says, dodging vagrants and joggers along the beach bike path. “I thought about it but decided I wasn’t going to do it. I told Maria I wasn’t running. I told everyone I wasn’t running. I wasn’t running.” Then, in the middle of the recall madness, Terminator 3: Rise of the Machines opened. As the movie’s leading machine, he was expected to appear on The Tonight Show to promote it. En route he experienced a familiar impulse—the impulse to do something out of the ordinary. “I just thought, This will freak everyone out,” he says. “It’ll be so funny. I’ll announce that I am running. I told Leno I was running. And two months later I was governor.” He looks over at me, pedaling as fast as I can to keep up with him, and laughs

This I totally believe. Arnold doesn't strike me as the sort of person who plans anything, but I think he's excellent at grasping the moment.

His view of his seven years trying to run the state of California can be summarized as follows. He came to power accidentally, but not without ideas about what he wanted to do. At his core he thought government had become more problem than solution: an institution run less for the benefit of the people than for the benefit of politicians and other public employees. He behaved pretty much as Americans seem to imagine the ideal politician should behave: he made bold decisions without looking at polls; he didn’t sell favors; he treated his opponents fairly; he was quick to acknowledge his mistakes and to learn from them; and so on. He was the rare elected official who believed, with some reason, that he had nothing to lose, and behaved accordingly. When presented with the chance to pursue an agenda that violated his own narrow political self-interest for the sake of the public interest, he tended to leap at it. “There were a lot of times when we said, ‘You just can’t do that,’ ” says his former chief of staff, Susan Kennedy, a lifelong Democrat, whose hiring was one of those things a Republican governor was not supposed to do. “He was always like, ‘I don’t care.’ Ninety percent of the time it was a good thing.”

Two years into his tenure, in mid-2005, he’d tried everything he could think of to persuade individual California state legislators to vote against the short-term desires of their constituents for the greater long-term good of all. “To me there were shocking moments,” he says. Having sped past a do not enter sign, we are now flying through intersections without pausing. I can’t help but notice that, if we weren’t breaking the law by going the wrong way down a one-way street, we’d be breaking the law by running stop signs. “When you want to do pension reform for the prison guards,” he says, “and all of a sudden the Republicans are all lined up against you. It was really incredible, and it happened over and over: people would say to me, ‘Yes, this is the best idea! I would love to vote for it! But if I vote for it some interest group is going to be angry with me, so I won’t do it.’ I couldn’t believe people could actually say that. You have soldiers dying in Iraq and Afghanistan, and they didn’t want to risk their political lives by doing the right thing.”

California is ungovernable.

Also, some interesting thoughts on exactly how the California public union compensation got to its current crazy levels:

Over the past dec­ade the city of San Jose had repeatedly caved to the demands of its public-safety unions. In practice this meant that when the police or fire department of any neighboring city struck a better deal for itself, it became a fresh argument for improving the pay of San Jose police and fire. The effect was to make the sweetest deal cut by public-safety workers with any city in Northern California the starting point for the next round of negotiations for every other city. The departments also used each other to score debating points. For instance, back in 2002, the San Jose police union cut a three-year deal that raised police officers’ pay by 18 percent over the contract. Soon afterward, the San Jose firefighters cut a better deal for themselves, including a pay raise of more than 23 percent. The police felt robbed and complained mightily until the city council crafted a deal that handed them 5 percent more premium pay in exchange for training to fight terrorists. “We got famous for our anti-terrorist-training pay,” explains one city official. Eventually the anti-terrorist-training premium pay stopped; the police just kept the extra pay, with benefits. “Our police and firefighters will earn more in retirement than they did when they were working,” says Reed. “There used to be an argument that you have to give us money or we can’t afford to live in the city. Now the more you pay them the less likely they are to live in the city, because they can afford to leave. It’s staggering. When did we go from giving people sick leave to letting them accumulate it and cash it in for hundreds of thousands of dollars when they are done working? There’s a corruption here. It’s not just a financial corruption. It’s a corruption of the attitude of public service.”

When he was elected to the city council, Reed says, “I hadn’t even thought about pensions. I can’t say I said, ‘Here is my plan.’ I never thought about this stuff. It never came up.” It wasn’t until San Diego flirted with bankruptcy, in 2002, that he wondered about San Jose’s finances. He began to investigate the matter. “That’s when I realized there were big problems,” he says. “That’s when I started paying attention. That’s when I started asking questions: Could it happen here? It’s like the housing bubble and the Internet bubble. There were people around who were writing about it. It’s not that there aren’t people telling us that this is crazy. It’s that you refuse to believe that you are crazy.”

The new Slate design sucks

I hate the new Slate design.

I haven't even looked at the nav or anything like that, but the typography is terrible. Letters are fuzzy and hard to read. It looks like someone's spilled water on all the text and it's bled a little.

The images also look fuzzy. It's terrible.

Kindle Fire

Amazon's such an amazing company. They've become the ur-etailer, and branched out to cloud computing (that few people know about) and now hardware. Wow.

I don't have a kindle, and I don't intend to buy a kindle fire, but the price point ($79! $199!) makes them almost impulse purchases. I've tried to get books on my iPad, but the experience and selection were awful, so for now I'm sticking to the library and buying used stuff on Amazon.

This is also the first serious implementation of Android on a tablet. Android -- the business model, the market approach -- reveals the extreme naivete of Google. It'll be interesting to see what a grown-up business does with it as it takes on the iPad.

Netflix vs Qwikster

Reed Hastings recently sent out an email apologizing for the price increase that came with splitting the streaming and DVD services at Netflix.

Some interesting points. First:

For the past five years, my greatest fear at Netflix has been that we wouldn't make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us).

Hastings is worried about the Innovators Dilemma. There are many big guns aimed at the streaming business, including Amazon, Walmart, the cable companies, Apple, and Google. That's a tough crowd to win against.

So...

It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming.

Bold. Hastings has decided that the DVD business, with its associated baggage, means that he will not be able to win the streaming market, so he's cut the company in two.

Streaming is about #9 on Amazon's priority list. #12 on Walmarts. #4 for the cable companies. #7 for Apple. #83 for Google.

It's #1 on Netflix because Qwikster has DVDs as its #1 and video games as its #2.

This, ladies and gentlemen, is management.

Unconventional Monetary Policy: From the comments

Special thanks to studentee for this link from Nick Rowe. The discussion is full of goodness, beyond the points raised in my previous post. In particular, I will pull out this assertion and rebuttal from Nick & RSJ.

First Nick:

I am Ben Bernanke. I commit to printing trillions and buying up every single financial asset -- government bonds, commercial bonds, stocks, and new stocks and bonds as issued, and will keep on doing this forever and ever until my NGDP target is met. At this point even rsj says, "OK, that would maybe increase future AD by $1, and increase future NGDP by $1". So now everyone starts spending more, even if it's just a small amount. But that's not an equilibrium expectation either, because we are still not at my NGDP target, so I repeat my commitment, and rsj raises his expectation another $1 when he sees that everyone else has raised their expectation too, and raised their desired spending. And so on.

Roosevelt did it. The Swiss did it. Central banks have been loosening monetary policy and creating inflation throughout history. Did history come to a full stop in 2009?

Half the US seems to be afraid of inflation. All Bernanke has to say is "Yep, I'm going to do whatever it takes to make sure your fears are justified!"

Now RSJ:

The Federal Reserve cannot purchase any financial asset. What the bank can and cannot do is defined in the Federal Reserve Act.

It can purchase obligations of the U.S. government, gold, bills of exchange, and agricultural paper. Adding that all up, you have at most about 7 Trillion or so of assets that the central bank can buy (it does not buy gold today).

After that, there is nothing left for the CB to legally buy.

Compare that to the 60 Trillion or so of U.S. assets that are out there.

Again, this is where knowledge of the institutions is important.

By the way, there is a *reason* why central banks cannot purchase "baskets of output" or "all assets", as you keep insisting.

Even the ECB, which has no risk free assets to purchase, is limited in what it can buy, both legally and effectively (e.g. politically, by the member banks that supply capital to it).

That reason is that should the CB purchase an asset that is defaulted upon, that loss of capital becomes a fiscal transfer from the ECB to the borrower.

That fiscal transfer has to be paid for by someone -- it is not paid for by the central bank, which is an intermediary between those who supply capital to it and its borrowers.

Therefore central banks can only engage in these types of transfers should the capital suppliers allow it.

In the case of the Fed, the capital supplier is the U.S. Treasury, and if the U.S. treasury wanted to make transfers (as under TARP), then it would do so itself, after permission from Congress, as spending needs to be authorized by congress and cannot occur as a result of CB policy.

So the democratic process limits the amount of fiscal policy that central banks can conduct under the guise of monetary policy.

Even if you are confused about the distinction between the two -- the legislators are not confused; which is why they have put strict limits on what central banks can and cannot buy, in order to limit any unauthorized ex-post transfers.

Discriminating minds want to know if Government backed Solyndra debt is (legally) purchasable by Bernanke. Also, how about open swap lines with Mexcico?

Just worth reading

Read the whole thing and the comments.