The Dotcom Bubble: A Response

Earlier today I wrote about the new dotcom bubble and how similar it seemed to the last dotcom bubble. A regular reader from Silicon Valley writes to offer a different kind of complaint:

See, this is the kind of crap you get when people look at "Silicon Valley" and see Facebook. The investors I have spoken to accept a fairly stable universe of Google, Facebook, Twitter, Apple, Amazon and Netflix into the mid-future. Nobody likes to look any farther down the road than two to three years anymore, so that's the horizon.

The excitement, the "bubble" if you will, is not about creating another Facebook, it's about finding a way to enhance and monetize an established internet ecosystem. It's the cloud, it's big data, it's Hadoop, Cassandra and Mongo on commodity hardware, it's faster, cheaper storage subsystems, it's scalability and flexibility, the sudden newfound ability to just "switch on" five hundred new servers with no capital cost, and turn around and switch them off on Tuesday. It's deep, low-latency analytics, clickstream analysis, social media mining, and targeted marketing. It's mobile localized communications. It's seamless integration between the OS, the browser, the web application server and the data, all stored in remote indexed and optimized servers that autonomously move the data closer to the user.

It's really interesting and exciting stuff, and all the pieces are almost there. They're still trying to figure out how to scale web properties to hundreds of millions of users, which is incredibly hard, especially because most of them were built on the previous generation's technology — think LAMP stack with sharded MySQL and Memcached. But the infrastructure is catching up. The hardware is actually moving backwards: lower-power, cheaper, slower processors, memory and disk, but now in a clustered and distributed environment that, because failures in that kind of environment are a common event, protect themselves against failure (think multi data center replication, autonomous P2P status monitoring, disk writes to append-only tables before memory writes...).

But most people don't know or care about that stuff. They just know about Facebook and Amazon and Apple, and they get frustrated when they don't work. And that leads to these articles that get the core part of the conversation so dreadfully wrong.

I didn't actually understand most of the geekspeak here (I've been out of touch with the tech world for too long), but I think the general point is sound: too often, when people think about the future of the internet, they focus exclusively on superstar apps like Facebook or Twitter and miss the impact of business apps and the plumbing that drives them. To the extent that the internet will have an impact on future economic productivity, this is where the action is.

Old Consumers, New Consumers

David Leonhardt explains the roots of our lousy economic recovery today: "We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble that was decades in the making." True enough. And in the short term, debt overhang and unemployment explain perfectly well why Walmart is increasingly noticing that its customers are running out of money at the end of each month. But I think Leonhardt skates over our real dilemma too hastily when he tries to turn this into a broader lesson about the economy:

In past years, many of those customers could have relied on debt, often a home-equity line of credit or a credit card, to tide them over. Debt soared in the late 1980s, 1990s and the last decade, which allowed spending to grow faster than incomes and helped cushion every recession in that period.

…The notion that the United States needs to begin moving away from its consumer economy—toward more of an investment and production economy, with rising exports, expanding factories and more good-paying service jobs—has become so commonplace that it’s practically a cliché. It’s also true. And the consumer bust shows why. The old consumer economy is gone, and it’s not coming back.

…The biggest flaw with the past stimulus was that it imagined that the old consumer economy might return.…A more promising approach could instead offer a tax cut to businesses—but only to those expanding their payrolls and, in the process, helping to solve the jobs crisis. Along similar lines, a budget deal could increase funding for medical research and clean energy by even more than President Obama has suggested. These are the kinds of investments that have brought huge returns in the past—think of the Internet, a Defense Department creation—and whose price tags are tiny compared to, say, Medicare or the Bush tax cuts.

This is fine as far as it goes, but it's basically a Band-Aid. I know this is too simplistic to be taken seriously, but here's my version of what happened over the past few decades:

  1. The economy grew just fine, but rich people got most of the money.
  2. They couldn't spend it all, and investment opportunities were limited, so they ended up loaning it out to the middle class in increasingly baroque ways.
  3. That worked fine until it didn't.

This problem metastasized during the aughts and ended in the Great Collapse of 2008. And I don't know how to fix it. But Leonhardt is too quick to dismiss the "old consumer economy." Modern mixed economies fundamentally depend on consumer spending growing over time, and that only happens if middle-class incomes are also growing over time. If we don't figure out a way to make that happen again, it's hard to see anything we do today producing durable economic growth in the future.

UPDATE: Jared Bernstein brings the numbers here. We haven't transcended the old consumer economy yet.

Explaining Away the Latest Dotcom Bubble

Here's the headline that greeted me when I opened my copy of the LA Times this morning:

Boom is back in Silicon Valley
Another tech bubble? Maybe. But some analysts say there are differences this time.

Everybody knows about the boom, so I didn't care much about that. What I did care about was learning what particular sophistry is making the rounds to explain why things are different this time. After trudging though a dozen paragraphs about Tesla roadsters, traffic jams on Highway 101, brisk business at Draeger's, Mark Zuckerberg's $7 million house, Apple's new spaceship-shaped campus, and six-figure offers to entry-level engineers, I found it:

Others dismiss talk of another technology bubble. They argue that more than 2 billion people are now plugged into the Internet through high-speed connections, creating vast opportunities for companies that are lining up millions of users and growing sales, even respectable profits. This boom, they say, is being driven not by greedy investors pumping up shares of dot-coms to irrational levels on public markets, but by private investors who are battling for stakes in hot start-ups like Facebook that could turn out to be the next Google...."These are all wealthy private individuals who understand the gambles they are making. It's not like in the dot-com days when grandma was placing bets on IPOs."

Uh huh. In other words, it's not 1999 yet, it's still 1997, back when private investors were battling for stakes in hot start-ups like GeoCities and theGlobe.com that could turn out to be the next Microsoft. Grandma came a couple of years later, during the Kozmo.com era, and she'll undoubtedly reappear shortly in some form that's just different enough from her 1999 guise to keep the illusion of differentness alive. Color me unimpressed.

Good Night

Here's a picture of the nearly full moon from a few days ago. Not bad for a cheap little camera, is it?

Black Sites in Somalia?

Jeremy Scahill has a long piece about Somalia in The Nation this week, which includes a charge that the Obama administration is effectively running a black site prison in Mogadishu despite promises two years ago that all the Bush-era black sites had been shut down. The following excerpt is long, but I want to include every passage in Scahill's piece that relates to the black site charge:

US agents “are here full time,” a senior Somali intelligence official told me. At times, he said, there are as many as thirty of them in Mogadishu, but he stressed that those working with the Somali NSA do not conduct operations; rather, they advise and train Somali agents.

....According to well-connected Somali sources, the CIA is reluctant to deal directly with Somali political leaders, who are regarded by US officials as corrupt and untrustworthy. Instead, the United States has Somali intelligence agents on its payroll. Somali sources with knowledge of the program described the agents as lining up to receive $200 monthly cash payments from Americans.

....According to former detainees, the underground prison, which is staffed by Somali guards, consists of a long corridor lined with filthy small cells infested with bedbugs and mosquitoes....A Somali who was arrested in Mogadishu and taken to the prison told The Nation that he was held in a windowless underground cell. Among the prisoners he met during his time there was a man who held a Western passport (he declined to identify the man’s nationality). Some of the prisoners told him they were picked up in Nairobi and rendered on small aircraft to Mogadishu, where they were handed over to Somali intelligence agents. Once in custody, according to the senior Somali intelligence official and former prisoners, some detainees are freely interrogated by US and French agents. “Our goal is to please our partners, so we get more [out] of them, like any relationship,” said the Somali intelligence official in describing the policy of allowing foreign agents, including from the CIA, to interrogate prisoners.

....Among the men believed to be held in the secret underground prison is Ahmed Abdullahi Hassan, a 25- or 26-year-old Kenyan citizen who disappeared from the congested Somali slum of Eastleigh in Nairobi around July 2009....“Hassan’s abduction from Nairobi and rendition to a secret prison in Somalia bears all the hallmarks of a classic US rendition operation,” [says Clara Gutteridge, a veteran human rights investigator]. The US official interviewed for this article denied the CIA had rendered Hassan but said, “The United States provided information which helped get Hassan—a dangerous terrorist—off the street.”

....Some prisoners, like Hassan, were allegedly rendered from Nairobi, while in other cases, according to Aynte, “the US and other intelligence agencies have notified the Somali intelligence agency that some people, some suspects, people who have been in contact with the leadership of Al Shabab, are on their way to Mogadishu on a [commercial] plane, and to essentially be at the airport for those people. Catch them, interrogate them.”

So what's going on here? There are roughly three ways the United States can be involved with black sites:

  1. Full-on black site: The prison is directly funded and operated by Americans and all interrogation is done by American operatives.
  2. Proxy prison: The prison is technically run by foreigners, but this is little more than a ruse. In reality, it's funded and operated by Americans with only a veneer of local control.
  3. Business-as-usual cooperation with foreign intelligence services, many of whom are pretty nasty: A friendly foreign government runs a prison. Americans provide training, intelligence, and payoffs to helpful locals who are nominally on our side, and in return they get periodic access to prisoners.

So is this more an example of #2 or #3? There's no argument from anyone that America has an intelligence presence in Somalia, and no argument that we provide counterterrorism training for Somali intelligence agents. Whether you approve of this or not, it's a pretty standard part of running the American empire. The two big questions, then, are (a) whether the payoffs to Somali intelligence agents are extensive enough to amount to proxy control of the prison by the United States, and (b) whether the United States routinely renders terror suspects from other countries and turns them over to the Somalis. Unfortunately, based on what's in Scahill's story, it's impossible to say. There's just not enough evidence.

So I'll just open this up for conversation. I figure that pretty much every country in this region has a bunch of nasty prisons, and in the regimes that are friendly toward us the CIA probably has periodic access to all of them. What's more, lots of these friendly regimes receive American aid, American intelligence assistance, and American training of various sorts. So at what point does this morph from squalid, but normal, business to proxy American control of black sites? Comments?

Getting Inside the Republican Mind

Let's review Republican priorities, shall we? First off, here are three Republicans explaining why a bad economy is something to be concerned about. Hint: it's not because of the human misery of millions of home foreclosures and tens of millions of unemployed.

From conservative analyst Erick Erickson, explaining why Republicans should wreck the U.S. economy via default:

Obama has a legacy to worry about. Should the United States lose its bond rating, it will be called the “Obama Depression”. Congress does not get pinned with this stuff.

From Senate Majority Leader Mitch McConnell, explaining why Republicans shouldn't wreck the U.S. economy via default:

It destroys your brand and would give the president an opportunity to blame Republicans for a bad economy. Look, he owns the economy. He has been in office almost three years now. And we refuse to let him entice us in to co-ownership of a bad economy.

From James Pethokoukis, tweeting excitedly last night about the brighter side of bad economic news:

Ouch!....Obama 2012 nightmare!....Alarms bells must be ringing loudly tonight across Obamaland....Panic at the WH?....GOP nomination very much worth having.

And here are a couple of other glimpses into what's motivating Republicans these days. Hint: it's all about protecting the rich.

From the LA Times, on the travails of the Consumer Financial Protection Bureau: 

When it opens its doors next week, the federal government's new agency to protect consumers from financial fraud won't be quite the aggressive watchdog promised a year ago....The agency won't have power, for instance, to crack down on mortgage brokers, some of which helped lead the nation into the housing debacle four years ago. It also won't have authority over other largely unregulated sectors of the financial services industry, such as payday lenders and remittance companies such as Western Union, that it was created to police.

....Vehement opposition to the agency from Republicans and much of the financial services industry has stalled efforts by the Obama administration to install a director, a five-year appointment that must be confirmed by the Senate.

From James Stewart on who benefits from cutting funding to the SEC:

Cutting the S.E.C.’s budget will have no effect on the budget deficit, won’t save taxpayers a dime and could cost the Treasury millions in lost fees and penalties. That’s because the S.E.C. isn’t financed by tax revenue, but rather by fees levied on those it regulates, which include all the big securities firms.

A little-noticed provision in Dodd-Frank mandates that those fees can’t exceed the S.E.C.’s budget. So cutting its requested budget by $222.5 million saves Wall Street the same amount, and means regulated firms will pay $136 million less in fiscal 2012 than they did the previous year, the S.E.C. projects.

Goldman Forecast: Economy Sucking Ever Worse

James Pethokoukis helpfully tweets an abysmal new economic forecast from Goldman Sachs:

In Obamaland these may be alarm bells, but if the rest of Pethokoukis's tweets are any indication, Republicans hear them as the bells of Christmas in July. Unfortunately, they understand the lessons of political science forecasting models all too well, so while it would be nice if conservatives would let us do something about this grim news instead of just standing cynically athwart the economy and yelling Stop, it's not going to happen. After all, there's an election coming up, and the worse off you are, the better off they are.

So suck it up, folks. There's no relief in sight.

The Return of the 8x8 Myth

Hooray! One of my favorite pet peeves is in the news again. It's the infamous — and endlessly debunked — 8x8 rule, namely that adults should be sure to drink at least 8 glasses of water per day. I got interested in this several years ago because I'm a human camel: I don't drink anywhere near that much water and I feel fine. So I wondered where this myth came from. Answer: after undoubtedly prodigious research, Heinz Valtin of Dartmouth concluded a decade ago that it most likely came from a single paragraph in an obscure government report in 1945. Here it is:

A suitable allowance of water for adults is 2.5 liters daily in most instances. An ordinary standard for diverse persons is 1 milliliter for each calorie of food. Most of this quantity is contained in prepared foods.

Note two things: First, this is based on no actual research at all. It's just a casual guess. Second, even if it's true, it was misinterpreted. Everyone read the first sentence, which suggests that a 2000-calorie diet requires 2000 ml of water, or roughly 64 ounces. But they sailed right by the second sentence, which says that you get a lot of this automatically in the food you eat. So even if this was good advice, it really meant something like five or six glasses of water per day, not eight or more.

So how much water should you drink? Answer: as much as you want. If you're thirsty, drink some water. If you're not, don't bother. And "water" includes coffee, tea, soft drinks, and pretty much any other water-based beverage. Water with caffeine in it is just as good as water without it.

So why am I writing about this yet again? Because I'm amused by the fact that every couple of years someone rediscovers this myth, looks into it, and publishes a journal article debunking it. Valtin wrote about water requirements in 2002, the Institute of Medicine tackled the subject in 2004, and in 2008 Dan Negoianu and Stanley Goldfarb published a comprehensive piece in the Journal of the American Society of Nephrology concluding that for normal, healthy people there's no evidence one way or the other that drinking lots of water has any health benefits. It doesn't clear your kidneys of toxins, it doesn't improve organ function, it doesn't help you lose weight, it doesn't prevent headaches, and it doesn't improve your skin tone. (On the other hand, it doesn't do any harm, either. If you're thirsty, feel free to drink some water.)

But that was three years ago, so it's time for another go-around. Jen Quraishi has the latest debunking today, reporting on a piece by Margaret McCartney in the current issue of the British Medical Journal. This time, though, there's a brand new source of dubious hydration nonsense to be debunked: the bottled water industry:

While McCartney didn't see evidence backing up the 2-liter-a-day rule, she did see bottled water companies pushing the "water=health" idea to sell more of their products. As McCartney wrote on her blog: "The bottled water industry is pushing the idea that we should drink more than we normally would with the promise of health benefits, and I don’t think there are any. That's all. And I would recommend tap rather than bottled water: cheaper, and far better for environment." The bottled water companies were not happy with McCartney's attitude. In response, the European Federation of Bottled Waters wrote a letter to BMJ about McCartney's article and cited a recommendation that "at least two liters of water should be consumed per day."

McCartney, in fact, goes even further than other researchers I've read: according to Jen, "she found evidence that mental performance suffers when people drink more water than they're thirsty for." So take it easy on the Big Gulps, OK?

Friday Cat Blogging - 15 July 2011

On the left, Domino is surveying her domain. The entire living room below is hers, all hers. On the right, my spy cam ferrets out Inkblot in his new favorite place. Normally, he spends morning nap time on our bed, but for the past week he's been camping out in a dark hidey hole underneath the guest bed instead. Don't ask me why. Occasionally a stray neuron fires and he suddenly decides he adores some new and different place. Next week it might be the bathtub. After that, who knows?

Here's an interesting chart via Paul Krugman. Atif Mian and Amir Sufi compared the strength of economic recovery on a county-by-county basis, and what they found was that virtually all of the continuing weakness is concentrated in areas where household debt is high. Consumption of durable goods is low, residential investment is low, and employment is low. Their conclusion:

Overall, the county evidence strongly suggests that credit demand is weak because of an overleveraged household sector....The evidence is [] consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery. King (1994) provides a detailed discussion of how differences in the marginal propensity to consume between borrowing and lending households can generate an aggregate downturn in an economy with high household leverage....Our view is that the depth and length of the current recession relative to previous recessions is closely linked to the tremendous rise in household debt that preceded it.

This isn't an easy problem to solve, but a couple of things leap out. First, high household debt is strongly correlated with underwater mortgages, and this could be partly addressed by a more aggressive program of loan modifications to replace the hapless HAMP program of 2009. Second, temporary tax cuts that put money in people's pockets are useful even if the money doesn't get spent. We won't get a full recovery until debt levels get back to normal, and the faster that happens the better. If tax rebates get used to pay off credit cards or mortgages, that's fine.