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Households, in other words, typically clean up banking messes.

That’s Michael Pettis with another great post. Some more great bits (all on China):

For years China bulls have been arguing that because the Chinese save so extraordinarily much money, there is plenty of room to stimulate consumption – just get them to save a little less.  The problem with this reasoning is that consumption is not low because Chinese households save a lot (they save in line with other Asian countries as a share of their income, and less than some).  It is low because household income is such a low share of GDP.

The only way to boost household consumption is either to redistribute income from the low-consuming rich to the high consuming poor, or, better yet, to redistribute wealth from the state to households. 

Earlier he pointed out a paper that discusses the waste inherent in infrastructure projects.

In the paper Flyvbjerg looks at infrastructure projects in a number of countries (not in China, though, because he needed decent data) and shows how the benefits of these projects are systematically overstated and the costs systematically understated. More important, he shows how these terrible results are simply the expected outcomes of the way infrastructure projects are typically designed and implemented.

It is not a very happy paper in general, but I am pretty sure that many people who read it probably had a thought similar to mine: if infrastructure spending can be so seriously mismanaged in relatively transparent systems with greater political accountability, what might happen in a country with a huge infrastructure boom stretching over decades, much less transparency, and very little political accountability? Isn’t the potential for waste vast?

This is one of those depressing pieces that makes you wonder how on earth anything can go right in the world. I’m reminded of a stat I once heard somewhere that something like 60% of all investment is completely wasted. On the one hand, you might think: “wow, that’s a lot of waste, how do we make any progress”. On the other hand, you can look around and realize the power of that 40%.

On the third hand, pause a moment and appreciate the magnitude of the mismanagement that goes into a REAL crisis. Waste is the norm in an economy (an ironic label if there ever was one, I suppose) so sufficient waste to blow away a substantial portion of NGDP in a year or two is staggering. And probably has a multitude of contributing factors.

Looks like an immense downshift (HA!) in driving activity. Who is driving so much less? We are WAY below trend, folks.

Could some of it be supply-driven? (ha aGAIN!)

Here’s Calculated Risk:

The decline in miles driven is probably due to a combination of high gasoline prices, a sluggish economy and some changes in driving habits.

That’s always the key question. Here’s Amazon’s mission:

We think this will be an effective way to develop commercially viable feature films. There are four things we think can make the Amazon Studios process valuable:

The power of the people. Amazon Studios will give artists and film fans around the world the chance to create and evaluate potential movies. We believe that feedback from a large number of people will be a helpful indicator of what is working and what is not.

Evaluate test movies, not scripts. With today’s inexpensive production and editing tools, it’s easier than ever to produce a visual expression of a script. People might find it easier to evaluate a story’s prospects as a movie by seeing it in movie form (even primitive movie form) rather than reading the script and imagining the movie.

Experiment. Complex problems often require a lot of experimentation to solve. Amazon Studios is designed to be a flexible environment where experiments are encouraged.

Collaborate. When a motivated group works together, openly experimenting and responding to feedback, it can make the most of everyone’s talent.

All well and good, but would you pay for this? If not, then how does it make sense? Consider this:

One interesting thing that I’ve always found about the film business from an economic point of view is that unlike in any other business I can think of, the cost of manufacturing the product has no affect on the purchase cost to the consumer. For example Honda can make a cheaper car with less features and cheaper finishes than BMW without losing all of their customers to the superior car because they sell their product for less. You spend less to make something, you charge less for it. Makes complete and obvious sense.

Not so in the film business. I am an independent film producer and I make films that typically cost somewhere between $5M and $10M. But when I make, say, an $8M film it has to compete at the same price level as the studios’ $80M or $100M film. It costs the consumer the same $12 at the multiplex (and whatever it costs to rent a DVD from Blockbuster these days) for either film. There is no price advantage to the consumer for choosing to see a less expensive film. This naturally makes it terribly difficult for smaller films to find an audience.

One possibility here is that the biggest value-add in the filmmaking process isn’t actually the film, it’s the promotional campaign. Most independent filmmakers desperately want to get picked up by the studios for one simple reason: distribution. As soon as the studios have you they buy ads.

Advertising creates demand. Unless Amazon has a way of kickstarting positive awareness feedback loops, the quality of the films on their site is irrelevant.

This kind of thing shines a slightly different light onto the whole SOPA thing. It has nothing to do with defending IP but everything to do with defending a distribution model that people say is dying, but maybe actually isn’t.

If you don’t read him, read this.

I think it’s useful to think of people who are unemployment has being forced out of the high productivity sticky-wage sector where they can work with lots of expensive capital to make pick-up trucks, into the flexible-wage scrounging economy where they can pick up cans, play guitar for tips, do odd house repair jobs, babysit for money, prostitution, deal drugs, etc, etc. Because these jobs are less productive, RGDP falls. And because they pay less than regular jobs, some people who aren’t desperate will rationally choose to watch some TV instead of working. That would probably be my choice (internet, not TV.)

When I was in high school I received a mark in a class that, to this day, I think was an error. An error in my favor.

It was really high. I remember mentally tallying up all of in-semester marks to try to estimate my score on the final exam. When I realized it was probably near 100% and might even have exceeded it I did something strange.

I immediately stopped thinking about it.

I felt horribly guilty and was terrified someone might find out. At the same time, I wasn’t about to turn myself in to the principal’s office because I got an unfair deal on the upside. All I wanted was for everyone to forget about it so that number would stick on my transcript.

With that in mind, have a read of this article that breaks down the top 1%. This part refers to the top half of the top 1%:

Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting.

Recently, I spoke with a younger client who retired from a major investment bank in her early thirties, net worth around $8M… I asked if her colleagues talked about or understood how much damage was created in the broader economy from their activities. Her answer was that no one talks about it in public but almost all understood and were unbelievably cynical, hoping to exit the system when they became rich enough.

By the way, I’ve heard this line before. The majority of people in these businesses figure out pretty quickly that they’ve hit the jackpot and immediately focus on the exit. They’ve won the lottery and want to extract everything they can as quickly as they can and then GTFO.

Without ruinous leverage distorting the financial system, you’d wind up with the top half of the top 1% filled exclusively with people who have build businesses and sold them. Much of those would be tech businesses (ie the drivers of innovation in our economy). I’d argue that’s just.

For the bottom half of the top 1%, life is like this:

The 99th to 99.5th percentiles largely include physicians, attorneys, upper middle management, and small business people who have done well.

Since the majority of those in this group actually earned their money from professions and smaller businesses, they generally don’t participate in the benefits big money enjoys. Those in the 99th to 99.5th percentile lack access to power. For example, most physicians today are having their incomes reduced by HMO’s, PPO’s and cost controls from Medicare and insurance companies; the legal profession is suffering from excess capacity, declining demand and global outsourcing; successful small businesses struggle with increasing regulation and taxation. I speak daily with these relative winners in the economic hierarchy and many express frustration.

I’ve had many discussions in the last few years with clients with “only” $5M or under in assets, those in the 99th to 99.9th percentiles, as to whether they have enough money to retire or stay retired. That may sound strange to the 99% not in this group, but generally accepted “safe” retirement distribution rates for a 30 year period are in the 3-5% range, with 4% as the current industry standard. Assuming that the lower end of the top 1% has, say, $1.2M in investment assets, their retirement income will be about $50k per year plus maybe $30k-$40k from Social Security, so let’s say $90k per year pre-tax and $75-$80k post-tax if they wish to plan for 30 years of withdrawals. For those with $1.8M in retirement assets, that rises to around $120-150k pretax per year and around $100k after tax. If someone retires with $5M today, roughly the beginning rung for entry into the top 0.1%, they can reasonably expect an income of $240k pretax and around $190k post tax, including Social Security.

While income and lifestyle are all relative, an after-tax income between $6.6k and $8.3k per month today will hardly buy the fantasy lifestyles that Americans see on TV and would consider “rich”. In many areas in California or the East Coast, this positions one squarely in the hard working upper-middle class, and strict budgeting will be essential.

So much of the burden of retirement is borne by pensions and health care. The top physicians and lawyers in the country enjoy the retirement of a high school teacher. Not saying that’s a problem, but it ain’t rich.

Krugman on the top 0.1%:

If you add together nonfinance executives, “financial professions”, real estate, and lawyers, you’ve got more than 70 percent of the total; plus some of the other categories are probably essentially business executives too. Basically, the top 0.1 percent is the corporate suits, with a few token sports and film stars thrown in.

David Merkel nails it:

The problem is this: there are entities that made bad loans in the past that expect to be paid back in full. They assumed the future would be far better than it turned out to be. There is no way that the loans will be paid back in full. The solution is paying back at a discount, whether through compromise or insolvency.

When everyone wants to pretend they didn’t destroy their wealth, guess what you need?

Inflation. Or, more accurately, expected inflation. At the very least this will raise asset prices and perhaps get things moving again.

I think that Merkel hates this answer but write-downs aren’t happening. That’s a slippery slope that might end in insolvency!

HBR has a few interesting pieces on IT, which got me thinking.

Here are 8 reasons you should hate IT. And and here are 8 reasons in response for why you should love it.

To me the discussion from Harvard misses the point. IT, when it is purely devoted to infrastructure, like internet connections and telephony, is fine. When IT suddenly gets thrust into the spotlight as a key cost-cutting or revenue-generating project, it isn’t IT anymore.

I think that a lot of the frustration over IT happens when managers look for a free lunch from their IT department. Oh, I heard that there’s some new technology that will let me do my job with fewer people or at a lower cost. Hm… I’ll just tell the IT department to build some gigantic customized software suite that takes advantage of this.

Projects like that are not infrastructure, they’re technology-related competitive advantages. You don’t win by outsourcing your competitive advantage.