From Ayn Rand to Antitrust - Alan Greenspan's Remarkable Journey to Enlightenment

Will miracles never cease? Alan Greenspan, Ayn Rand "devotee" and former advocate of laissez-faire capitalism, now favours aggressive antitrust! "Break up the big banks," he says.

“If they’re too big to fail, they’re too big,” Mr. Greenspan said. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”

Yes, yes, yes, yes, yes!

I must say it's very flattering when a major public figure reverses position to agree with you! It also invites contempt for the public figure in question.

Is the Australian government listening? We need a Ten Pillars Policy, Mr Rudd.

Neat Slogan for Hindu-Muslim Amity

I saw this comment on a blog today and thought it was cool.

"When Qaynat* has put Ali in Diwali and Ram in Ramadan, who are we to fight?"

* Nature, the Universe

JDRF Walk to Cure Diabetes 2009

Sunday Oct 18th, 2009: Like we did last year, my wife and I signed up to join the JDRF (Juvenile Diabetes Research Foundation) Walk to Cure Diabetes.


This year, the venue was Parramatta Park and not the Sydney Olympic Park. The crowd was decent-sized, but I thought it was half or even a third the size of the turnout last year. Someone told me there were two or three different walks this year at different venues, so the crowd was probably split between them.


The surprise VIP appearance at today's event was NSW Premier Nathan Rees, who said a few encouraging words about Australia being a world leader in several areas of medical research and expressed the hope that Australian research would pioneer a cure for diabetes. He then flagged off the walk, which lasted a little over an hour.


It was a cloudy day, so thankfully it wasn't too hot. There was a relaxed atmosphere throughout. Families with kids in strollers, on bikes and scooters, and with dogs in tow. There had been some fun events in the morning before the walk got started, but we missed them, having arrived with just minutes to spare for the main event.

Disappointingly, no other families could join us this year. We had about four families in our team last year, so we could enjoy a little picnic after the walk. This year, Diwali happened to be just the previous day, so many Indian families had a late night the previous day and couldn't join us for a morning walk.


Though the walk is over, readers are still welcome to donate to the cause through my collection page. It should be open for a few days more. Here's hoping the money raised helps to find a cure for juvenile diabetes. At the end of the day, it's about finding a cure, which is neither a picnic nor a walk in the park.

A Schizophrenic View of the Threat from Pakistan

I had to laugh when I read this news item, dour as it was. Here's an unprecedented attack by militants on the Pakistani army's headquarters. It signals a strength and reach of terrorism within Pakistan that should unnerve watchers of the subcontinent. Wouldn't a reasonable person be worried about Pakistani nuclear weapons falling into the hands of terrorists? September 11 has made the US absolutely paranoid, as we all know, and the London bombings have given the UK a similar jolt.

But what do we hear from the top diplomats of the Western world about this latest development? One has to wonder what Hillary Clinton and David Miliband are thinking/smoking. If their statements represent the views of the US and UK governments (as they surely do), they invite utter contempt for the leading Western powers.

"Yesterday was another reminder that extremists ... are increasingly threatening the authority of the state, but we see no evidence they are going to take over the state," Mrs Clinton said.

"We have confidence in the Pakistani government and military's control over its nuclear weapons," she added.

[...]

UK Foreign Secretary David Miliband said Pakistan faced a "mortal threat", but there was no risk of its nuclear weapons falling into terrorist hands.

I have to ask - Is there some magic spell that protects Pakistan's nuclear weapons, such that even though the Pakistani state may be in mortal danger from "militants" (read "terrorists"), those weapons will always be safe?

You know what I think? Here's my conspiracy theory. I think the US swooped down on Pakistan in 1998 as soon as that country demonstrated its nuclear capability, and took away all its weapons. After all, what Pakistan requires for its purposes is just the façade of nuclear capability to bluff the world with, not the weapons themselves. I'm sure the Americans assured the Pakistani generals that this would be their little secret. I can see no other reason for the sanguine response of Western countries to what should otherwise be a very worrisome situation indeed.

Corollary: If this is true, and Pakistan is indeed a toothless nuclear tiger, there should be nothing to hold India back from rolling over that country the very next time there is a terrorist attack launched from there. A risky gamble, though.

Nobel Peace Prize for Obama - A Bit Premature?

I was very surprised to read the news of President Obama winning the Nobel Peace Prize. So surprised that I at first thought it was an elaborate April Fool's joke (of course it's October, but still).

Now readers of my blog know that I greatly respect and admire the man, so I don't grudge him the prize at all. I believe that by the time he completes his two terms (which he should if all goes well), he would have achieved enough to deserve the award twice or thrice over.

However, he hasn't really achieved anything yet. All we have so far is hope, because he has made a good start on many fronts. He has adopted a more conciliatory, less arrogant tone in public discourse. He treats even his adversaries with respect and tries to win bipartisan support for his initiatives. US foreign policy has suddenly begun to appear almost benign after decades of being a bag of dirty tricks for the rest of the world. And his personal style is magnetic and charming. No one but the most die-hard Republican/Conservative can fail to be impressed. But it's still only a good start. The results aren't in yet.

I think the Nobel Prize Committee jumped the gun. They really should have waited. This year's prize should have gone to the various relief agencies that pitched in to help victims of natural disasters around the globe. That would have been a more timely recognition of valuable work going on right now. What will the committee do after a few years, when Obama actually achieves some tangible outcomes? Award him a second prize?

In short, I don't think Obama's Nobel is undeserved, just premature.

[The Taliban have criticised the award to Obama. That settles it for me. Now I'm fully convinced he deserves it :-).]

Why Telstra's Shareholders Should Support the Company's Breakup

Even as I write, forces are gathering to pressure the Australian government to back down from its aggressive posture towards the telecom monopoly Telstra that is forcing the company to voluntarily split into two independent entities if it is to remain a significant player in the Australian economy.

Large shareholder bodies, fearful for their own losses, are attempting to bully the government into letting the status quo remain. Which is both shameful and a shame.

The enormous ongoing costs of a monopoly like Telstra to the Australian economy as a whole is well-known. Australian consumers pay higher prices for services than consumers in other advanced economies, and it really shouldn't come as a surprise to anyone. The link between monopolistic markets and high prices is well-known. It should be the duty of every government to crack down on monopolies and keep markets free and liquid. That's why it's shameful that Telstra shareholders are ganging up against Australian society as a whole, brazenly asking to be allowed to profit at the expense of everyone else.

I am a Telstra shareholder too, though admittedly not on the same scale as AFIC. By AFIC's logic, I should be joining the chorus against the government's bold action.

Actually, I believe that I would benefit from a breakup of Telstra, both as a consumer and as a shareholder. That's why I support the government's hardline position. This is the point a lot of shareholders don't seem to get, which is a shame.

When the US Justice Department forced a breakup of AT&T in 1984, one would have expected AT&T shareholders to suffer. And perhaps those who sold their shares in the period immediately following the breakup did sustain losses. But it's instructive to see what happened in the longer term. Each of the 8 "Baby Bells" that were carved out of the single entity went on to become bigger than "Ma Bell" within a decade. The shareholders who held onto their shares and waited a few years reaped the benefits.

In similar fashion, when Telstra splits into two companies, I expect to receive equivalent shares in both. Sure, their combined market value will initially be less than the market value of shares in the undivided company. But rather than sell my shares in a hurry, I intend to wait till they both rise. Then I expect to be sitting on more capital than before.

But wouldn't increasing competition hurt Telstra's monopoly profits and therefore depress share prices even in the longer term? Only if the company has been efficiently harvesting its monopoly so far. On the contrary, like all complacent monopolies, I believe Telstra today is fat and lazy. It charges its customers more than it should, and it pays its shareholders less than it should. The differential evaporates as corporate waste. And why wouldn't Telstra be wasteful? It's a monopoly, after all.

As a Telstra shareholder, I want to see the government deliver a swift kick in the pants to this giant sloth to get it to smarten up, work harder and provide better returns to shareholders even as it drops its prices to customers in a more competitive market. I want to benefit both as a consumer and as a shareholder. Is that realistic? It looks like I'm expecting money to appear from nowhere, but what I'm really expecting is an efficiency dividend. When competition emerges in a market, waste disappears, and both consumers and shareholders see more money in their pockets.

That's why every enlightened Telstra shareholder should write to the Minister for Broadband, Communications and the Digital Economy, Senator Stephen Conroy (minister@dbcde.gov.au), and urge him not to yield to the shortsighted bullying tactics of fat cat shareholder lobbies.

As I have done.

Update 09/10/2009: I have written to the Senate Standing Committee on Environment, Communications and the Arts (eca.sen@aph.gov.au) expressing my support for the government's position. It's perhaps more important for enlightened shareholders to have their voices heard by this body than for them to write to the minister.

Economic Principles that Work

I have had discussions with various friends about broad-brush Economic philosophies such as "Capitalism" and "Socialism", and we have agreed that these labels are largely meaningless because different people understand them to mean quite different things.

We then talked about "goals" being more important than "isms", but again, different people may believe in different goals for a society. For example, is it more important to first eliminate poverty (through government intervention if required) or to set up a functioning market economy without distortions?

The discussions seemed to be getting nowhere, so I decided to take a leaf from the book by Al Ries and Jack Trout, a book called "Bottom-Up Marketing." In it, the authors argue that rather than start with a grand strategy and derive tactics from it, the most successful military and business ventures have taken successful tactics and built strategies around it. The German strategy of Blitzkrieg was based on the observed capabilities of the armoured tank and of newly-improved radio communication. It was not a strategy derived from blue-sky thinking.

Perhaps in similar fashion, we can find examples of economic principles (shorn of ideological "isms") that work, and these can be put together into a coherent economic policy for a country. I admit that I have cheated a bit. I'm fortunate to be living in a country (Australia) that has enjoyed about 20 years of uninterrupted growth even as the rest of the world has undergone boom and bust cycles. The two striking features of the Australian economy are a near-constant budget surplus throughout this period, and a stated policy by the independent Reserve Bank of Australia to manage interest rates so as to keep inflation in the range of 2-3%. So finding economic principles that work has been largely a matter of describing the features of the Australian economy, but of course it wasn't just that.

So here goes. This is my list of principles, some of which have been proven to work, some of which could work under certain conditions, and some of which have been discredited. Obviously this has serious biases. It's my opinion, after all ;-).

1. Principles that are known to work and should no longer be controversial:

Principle: Prudence
Lay description: Don't spend more than you earn.
Label(s): "Fiscal conservatism"
Features: A balanced or surplus government budget, cost/benefit analysis of projects, sound project management
Notes: The Australian federal budget has been in surplus for many years until the fiscal stimulus of 2008-2009 and is projected to be back in surplus by 2014-2015.

Principle: Accountability
Lay description: (1) No one is above the law. (2) Deliver results to stakeholders, or else.
Label(s): "Democracy", "Rule of law"
Features: Institutionalised checks and balances, regular elections, power of recall, strong opposition, independent judiciary

Principle: Transparency
Lay description: Eliminate corruption, build faith in the system.
Label(s): "Transparency"
Features: Formal processes, Right-to-Information laws, office of auditor-general/public ombudsman, free press, legislative review

Principle: Market efficiency
Lay description: Ensure that no buyer or seller (or small group thereof) can skew the market.
Label(s): "Free market", "Liquid market", "Competitive market", "Efficient market"
Features: Competition watchdog (with teeth), strong antitrust law
Notes: Perhaps this is the one area where the Australian economy is wanting. The lack of competition in the banking sector is only just being realised and discussed. At the same time, the telecom monopoly is finally being addressed and will hopefully be dismantled.

Principle: Stable growth
Lay description: A central bank manages interest rates to contain inflation in the 2-3% band.
Label(s): "Responsive monetary policy"
Features: Independent central bank, stated inflation target
Notes: This focus of the Reserve Bank of Australia (RBA) together with a near-constant budget surplus has delivered 20 years of consistent growth even during periods of global recession.

Principle: Risk management
Lay description: Systems to identify and protect against various kinds of risks (mainly economic).
Label(s): "Diversification", "Risk regulation"
Features: Markets with breadth and depth, multi-skilled workforce, demographic diversity, risk management regulation, culture of risk management
Notes: There are many aspects to risk management, but its existence is generally a hallmark of a sophisticated economy.

Principle: Basic education
Lay description: Compulsorily educate all children.
Label(s): "Compulsory universal primary schooling"
Features: Fee-free public schooling upto and often including high school
Notes: All children must be afforded at least primary education, because literacy and numeracy are life skills and uneducated adults are a cost to society.

2. Principles that are controversial but can work provided they don't violate the first set:

Principle: A fair society
Lay description: This is one of the most misunderstood and variously interpreted principles, attracting a number of labels depending on the aspect being highlighted or criticised.
Label(s): "Meritocracy", "Affirmative action", "Equal opportunity", "Welfare state", "Social Security", "Egalitarianism"
Features: Constitution, bill of rights, independent judiciary, unemployment benefits, universal healthcare, tolerant society
Notes: As long as the budget stays balanced, these need not have downsides.

Principle: A skilled workforce
Lay description: Working age people have skills of a high quality that are productive in the economy.
Label(s): "Knowledge society",
Features: Universities, polytechnics, culture of higher education, incentives for higher education
Notes: Higher and technical education help a nation compete, but should not come at the cost of a deficit budget.

Principle: A healthy populace
Lay description: Affordable health care (prevention as well as treatment) for all.
Label(s): "Welfare state", "Universal healthcare", "Socialised medicine"
Features: Various mechanisms - single payer, compulsory private insurance, Medicare, etc.
Notes: Universal healthcare is an emotive issue, but should not be sought at the cost of a deficit budget. Prudence pays better long-term dividends.

Principle: A world market
Lay description: Free trade based on the principle of comparative advantage of nations.
Label(s): "Free trade"
Features: Low tariffs, low administrative/bureaucratic barriers to trade
Notes: Governments need to ensure both competitive/liquid markets and adequate diversification to maximise gains and reduce risk.

Principle: A regulated economy
Lay description: Government intervention in the functioning of the economy through a variety of mechanisms.
Label(s): "Mixed economy", "Public sector"
Features: Government ownership of enterprises, regulation of commercial activity (antitrust, price-setting for utilities, etc.)
Notes: Often criticised by advocates of a "free market" (itself a vague term), government intervention, if done well, can aid market liquidity by keeping commercial players honest, and can also provide much-needed services not provided by commercial players.

Principle: Wealth creation
Lay description: Tax incentives that benefit the well-off rather than those of more modest means.
Labels: "Supply-side economics", "Tax breaks for the rich", "Regressive taxation"
Features: Relatively low tax rates, modestly progressive tax slabs, tax-deductibility of investments, high income disparities
Notes: Taxation can often be a disincentive to wealth creation, but winding back taxation should not result in a deficit budget.

3. Principles that sound great but are observed not to work in practice:

Principle: Job security
Lay description: Legalised protection of jobs.
Label(s): "Socialism", "Protectionism", "Trade unionism"
Features: Strong trade unions, strict labour laws, no hire-and-fire, high import tariffs, tight immigration controls
Notes: Minimising unemployment has instinctive appeal, but the goal may be better reached by focusing on other targets, e.g., low inflation. The direct approach often has the opposite effect.

Principle: Unregulated markets
Lay description: Government stays out of the market altogether.
Label(s): "Capitalism", "Free market", "Laissez-faire economy", "Libertarianism", "Small government", "Monetarism"
Features: Limited government interference/intervention, unchecked market distortions (oligopolies and monopolies)
Notes: Recent failures in several economies with unregulated markets have shown the folly of this principle. Some regulation seems to be necessary, especially around keeping markets open and competitive and subject to risk management discipline.

Principle: Equality (as opposed to equal opportunity)
Lay description: Ensure that incomes, lifestyles, etc., are not too divergent.
Labels: "Socialism", "Communism", "Classless society", "Egalitarianism", "Tall poppy syndrome"
Features: Disincentives to wealth-building, limited private ownership, demonisation of "elites"
Notes: Fairness and equality of opportunity are more pragmatic principles that lead to an egalitarian society, where even the lowest-paid have an adequate standard of living to maintain their dignity and all have equal rights. Force-fitting an entire society into a mould of artificial equality only succeeds in making everyone equally poor, as the example of the communist countries has shown.

That's the lot, as far as I can tell. The question I have for the rest of the world is, if Australia can do it, why can't you?

How Brakes Can Make a Car Go Faster

I recently attended a talk on Governance, Risk and Compliance at which Forrester analyst Tim Sheedy said something interesting and original.

He likened the Risk Management function in an organisation to the brakes in a car, and asked the audience what brakes do. The answer of course was that brakes slow down or stop a car. He agreed and said that's how organisations have seen the Risk Management function, i.e., as something that slows down business.

He then asked the audience how fast they would be willing to drive their cars if they knew the brakes weren't working. The answer was "very slowly indeed".

And so Sheedy pointed out that brakes actually make it possible for cars to go faster! In similar fashion, Risk Management helps business do more rather than less.

This reminds me of a couple of similar ideas I have heard.

One is around a way to prevent deaths due to car crashes. The conventional solution is to place an airbag in the steering column to protect drivers. The unconventional solution is to place a sharp spike on the steering column, with the effect that drivers will then drive very carefully indeed!

Another idea I have discussed on this blog earlier is about how Economics differs from Physics. You often make something happen by enabling its opposite. If you want to conserve hard currency within your economy, then you don't prevent people from taking it out (that will have exactly the effect you don't want). You should in fact make it easier for people to take hard currency out. That will ease the fears of investors who will then more readily bring hard currency into the economy, because they are assured that they can take it out whenever they want.