Tuesday, October 28, 2008

White Spaces, In Contrast

The white space debate, for all its technical complexity, is otherwise very simple to judge. So many frequencies remain unused or dramatically underutilized – either in space, or in time, or both. A cognitive radio should therefore be able to fill in these blanks with useful stuff, such as Internet access akin to WiFi, WiMax, HSPA, EV-DO and LTE.

Most of these frequencies are between 150 and 850 MHz. This makes them particularly complementary to most of the cellular frequencies, who start at 850 MHz in the US (soon 700 MHz) and at 450 MHz in some other European countries (although mostly 900 MHz). Most other cellular frequencies reside between 1700 and 2200 MHz, while WiFi and most mobile WiMax launches are between 2300 and 2700 MHz.

These lower frequencies are used for things such as old-fashioned broadcast television and military applications. Some of those military applications have limited geographic scope, and many of the allocated television channels are also not used in most areas. Those are cases where this spectrum ought to be privatized outright, under any circumstance. At a minimum, this spectrum can be repurposed for as long as no interference is proven. Basically, there is no downside to trying. In this respect, the advocates of white space use legalization are 100% correct.

However, the white space argument is even stronger and ought to be taken at least one full step further. Over 90% of American households have cable TV, satellite TV, or some other form of non-terrestrial broadcast TV such as wired TV from a telco (Verizon FiOS, AT&T U-Verse etc.). This percentage has also been increasing. With only a few remaining households taking up this valuable real estate in the air, it’s beginning to look like the “bridge to nowhere.” Basically, we are foregoing an untold billion dollars (perhaps trillions) in consumer welfare just so that a tiny single-digit percentage of households can get to watch a handful of channels without paying for TV from cable/satellite/telco. This is a shameful exploitation of government property, at a huge expense.

The solution is of course very simple: The government a long time ago should have told the TV broadcasters that the game is up. No more any free ride. No more exploitation at the public trough. This is valuable real estate, which, just like almost all government property, should be sold to the highest bidders as soon as possible. Just this February, the sale of a few tiny thin slices of the 700 MHz spectrum fetched $20 billion. Imagine what the spectrum all the way down to below 200 MHz would fetch?

This idea isn’t new; I have been proposing it for years. The rebuttal has always been that this is somehow politically impossible. I have never understood this argument, because we talking about less than 10% of households who are exploiting the other 90%+. Any politician worth his salt ought to be able to explain that the only thing standing in the way of vastly more available, capable and lower-priced wireless broadband are a bunch of people who refuse to get cable/satellite/telco TV, just like the rest of us.

Some say those 10% are unusually poor, and need access to free TV. To this I say: If they are that poor, they are probably watching too much TV, and working too few hours. Daytime TV is also a bad influence, culturally. Besides, those same people who insist on watching free TV, are also the same people who smoke and drink for a lot more money than it would cost them to pay for the same kind of cable/satellite/telco TV subscription that the rest of us do. People shouldn’t have to run around and pay for each other’s entertainment habits. What’s next – government-subsidized movie tickets, opera passes or ballpark games? Wait – don’t give the new Congress any ideas…

Fund Manager Game Plan 2008

The plural of anecdote is data. Following many conversations with the nation’s savviest fund managers, I have discovered how we explain the timing of the 2008 market decline. It is essentially a two-step process:

First, once Obama won the Iowa caucuses in early January, it was time to start selling shares in anticipation of some probability of the risk that he may win on November 4. As the year progressed, this probability has been increasing, intensifying the market sell-off. The idea is that if you thought it were a 100% probability that Obama may win on November 4, you wanted to be in 100% cash (or 100% short, or some combination thereof). Right now, the www.intrade.com odds are close to 87%, which would indicate you may be in 87% cash, having left 13% on the table for now, in the market.

Second, assuming Obama wins on November 4, you would be in 100% cash by November 5, at which point you have a few weeks to transfer the money abroad before it would come under Obama’s 2009 IRS jurisdiction. If you transfer your money abroad by December 31, you would avoid a frontal collision with confiscatory socialism.

This is rational human behavior. The only irrational thing about this situation is that McCain has mysteriously failed to point it out.

No Such Thing As Redistribution

Language often contains subtle biases. Take the current spat over “spreading your wealth around” for example. The debate has finally moved into the area of Marxist philosophy, in which Obama is said to favor “redistribution of income” and/or “redistribution of wealth.”

One of the problems with this description is that the word “redistribution” assumes that something has been distributed to begin with. It hasn’t. Something was earned, not distributed. Therefore, the government can’t redistribute something that wasn’t distributed in the first place. Someone made the money, and now the government is seeking to take it. That’s more like legalized theft, not some soft-soapy and obfuscating “redistribution.”

I don’t understand why McCain is choosing adopt language that resides on Karl Marx’s home turf. It’s the right thing to do to tie Obama to Marx’s socialist economic philosophy, but no need to let him off the hook lightly by giving him the benefit of a misleading choice of words.

Sunday, October 26, 2008

Conversation With an Obama Volunteer

I wish this account were an “Only in The People’s Republic of Palo Alto” story, but it probably isn’t. It happened this Sunday afternoon, nine days before the election. I was walking up University Avenue and encountered three young ladies on a street-corner. Normally I don’t engage political activists, but this time I made a rare exception. I’m not completely sure why, but it may have had something to do with the fact that these three young ladies were dressed like my favorite Olympians – the women’s beach volleyball teams. Not quite as tall, and at the very most half my age. This is my best recollection of the 5 minute encounter:
Obama Volunteer (OV): Want to help Obama become President? Any questions we can answer?
Anton Wahlman (AW): I do have a question. Can you explain how Obama differs from Jimmy Carter on one or several issues?
OV: Carter who?
AW: Jimmy. Our country’s 39th President.
OV: Oh, I have no idea. We were all born in 1990!
AW: But surely you have studied history?
OV: We sure have. That was back when America was oppressing the African-Americans, right?
AW: Probably not, but what I had in mind were things such as unemployment rate, interest rates and inflation.
OV: The unemployment rate has never been higher than now; haven’t you seen the news about the crisis on Wall Street?
AW: The last reported figure was 6.1%. 30 years ago it was close to 10%. Is Obama going to do anything different from Jimmy Carter?
OV: Carter was probably very old. Obama is just so cool. He will make it so entertaining. What else did you ask again?
AW: Interest rates and inflation.
OV: I’m not sure either of those is that important. They may have been important before, but this election is about change. Besides, I’ve never heard of an inflation problem.
AW: Well, we haven’t had much inflation in the last 25 years, but it went well above 10% some 30 years ago.
OV: So what does that have to do with the change Obama is proposing?
AW: The point is that if he is going to spend all the money he is promising, and if he isn’t going to raise taxes on 95% of the people, and the other 5% move their money abroad, he eventually has to print the money. And that means record inflation.
OV: Not under Obama it won’t. That’s what change is all about.
AW: That defies gravity. Are you saying that the world will levitate once Obama is sworn in on January 20?
OV: Inflation is more in the head of people if they talk about it on TV. I think Obama is so smart that if he prints a trillion dollars, he just won’t tell anyone. So inflation won’t show up. That’s the new politics will have in the future. Don’t you see I’ve got “Change” painted around my belly-button?
AW: Amazing. So what about interest rates? Under Carter I seem to recall they hit 18% or more.
OV: Who uses them?
AW: Uses what?
OV: Those interest rates.
AW: Well, let’s see – the biggest credit purchase tends to be buying a house.
OV: Dude, we live in the Stanford dorms.
OV #2: And if you need money, mom and dad will send us some. I think we should just abolish interest rates anyway. Besides, weren’t they the cause of the financial crisis?
OV #3: Our political science Professor pointed out that interest rates are only a tool to exploit the poor and the African-Americans. They should just do away with them. So that Carter stuff you’re talking about, it wouldn’t apply. Anything else we can answer?
AW: I think I just got my confirmation. But wait! I just wanted to ask about what you think of foreign policy after 9/11, whether Obama will make sure no terrorists walk across the border from Mexico?
OV: 9/11, that’s such a long time ago. Is it relevant anymore?
AW: 9/11 was in 2001, seven years ago.
OV: Exactly. I was starting Junior High around that time. Getting away from 9/11 is part of change.
AW: So are you drawing any conclusions of what happened on 9/11?
OV: I dunno. I guess we were a bit late to install reinforced cockpits.
AW: That’s it? What about Islamic extremism? Do you think they want to kill us, or not?
OV: They won’t now! Obama is basically President of the whole world. Everyone loves him.
AW: Alright, have a nice day girls. One day, you too will grow up. In the meantime, read some history, take Economics 101 and perhaps even 201.

Who Is John Galt? We'll Soon Find Out

For those of you who wonder how our country will play out after November 4, look no further than Ayn Rand's 1957 novel Atlas Shrugged. In that book, anti-business policies in the form of higher taxes and more regulation caused the major captains of industry to go on strike, shutting down wealth-creation as we know it. That's the essence of Atlas Shrugged, and that is – at least directionally – what we may face if such policies are enacted in coming months and years.

Actually, "shutting down" isn't the only option for investors and businesspeople anymore. Back in the 1950s, when Ayn Rand authored Atlas Shrugged, the US constituted an extremely large share of the world economy. In 1951, the average American ate 50 percent more than the average European. Americans controlled two-thirds of the world's production, owned 80 percent of the world's electrical goods, and produced more than 40 percent of its electricity, 60 percent of its oil and 66 percent of its steel. America's 5 percent of the world's population had more wealth than the other 95 percent, and Americans made almost all of what they consumed: Over 99.9% of new cars sold in the U.S. in 1954 were U.S. brands. By the end of the 1950s, GM was a bigger economic entity than Belgium, and Los Angeles had more cars than did Asia.

There were very few other advanced, functioning economies. The US captains of industry had no ships to sail, no destinations to go. In this respect, the world has changed radically not only over the last 50 years, but perhaps the most dramatically in the last 15: The rise of the Asian economies from India to China, Eastern Europe and Russia, as well as Dubai as the Hong-Kong of The Middle East. Over 3 billion people now have cell phones – half the world's population. Cell phone penetration is Moscow is 176% -- the average Moscowite has 1.76 cell phones.

For this reason, unlike the industrial shutdown in Atlas Shrugged, we could simply see a giant emigration of capital, businesses and eventually people. This has started already, with individual investors and investment funds winding down US-domiciled investments in preparation for international transfers if the US becomes filled with anti-business, anti-rich and anti-Wall Street policies. Most Silicon Valley companies have already been locating an increasing percentage of their workforces abroad.

16 years later, Ross Perot would have called this "The Giant Sucking Sound." In Western Europe in the 1950s, they called it "The Brain Drain." People from all over the world, looking to get ahead, were moving their money, their businesses, and themselves, to The Shining City On A Hill – the place where the business climate was better. We saw it in our universities, we saw it in Silicon Valley, and we saw it on Wall Street. Well, I hope you captured those memories on your home video camera, because the new anti-business climate in America will make them only a memory.

Some Republicans used to make a big deal as late as 2007 about our immigration problem. Now they will have to focus on describing our emigration problem. In 2008, the emigration of our capital started, and it belonged to John Galt.

Why is McCain Playing Defense on This Market?

His other forward-leaning arguments aside, McCain has been playing defense on the recent decline in the stock market. His defensive posture, insofar as he doesn't have much of a posture at all on the stock market, can subconsciously be interpreted to mean that he feels a bit guilty about it, and therefore avoids the issue. It's become the millstone around his neck.

This is the wrong tactic for McCain! The argument he should be making is that one contributing reason for the market's decline this year is that the market participants dislike Obama's plans for taxes, spending and regulation. Imagine the political narrative if at least half of Americans had come to believe that this is a reason for the market decline?

The merits of the market causality argument can be debated until the end of time. Obama supporters would disagree that his tax, spending and regulation plans are contributors to the market decline. Free-market people will claim that the argument is basically axiomatic in its logic. The point here, however, is not with the fundamentals of that market causality argument – even though I think it is indeed axiomatic in its logic – but rather one of political tactic. By failing to make the argument, McCain is essentially ceding this election season's most valuable real estate to Obama because of a lack of resistance on this crucial issue. This is probably majority of the reason why McCain fell behind in the polls starting in mid-September.

McCain's failure to blame some part of the stock market decline on the market's fear of an Obama Presidency is an even bigger omission than McCain's failure to rebut Obama's linking him to George Bush: I never once heard McCain rebut Obama on this issue – such as in the TV debates – by reminding people that the only one in this election who has ever run against George Bush is actually John McCain, in the 2000 Republican primary. McCain conspicuously fails to rebut Obama by reminding the American people that he sat across the table from George Bush on live TV and basically called him a scumbag. Nobody else has done this.

At this point, McCain's failure to link Obama as one contributing factor to the market decline, will likely cause McCain to lose this election. That is, unless he starts to make this argument his central one for the last 10 days.

Sunday, October 12, 2008

The Difference Between 1993 and 2009

At the center of Senator Obama's tax policy argument is that by raising taxes on the top 5% of income earners, we are only returning to President Clinton's 1993 tax increases. Let's for a moment leave aside that Obama really is looking to raise taxes on social security (above incomes of $103,000) and on everyone's capital gains, regardless of income. Rather, the Obama argument goes that because we had a relative economic boom following the 1993 tax increase, it's perfectly safe to raise taxes in 2009 as well.

Wrong. There is a major difference between 1993 and 2009 that Obama and McCain alike are both failing to articulate. In 1993, the U.S. was one of the world's lowest-tax countries, with Europe mostly at much higher rates, and most of the Asian economies too underdeveloped to be alternatives for investments and businesses. Eastern Europe was under a cloud of uncertainty and instability following the rapid demise of The Soviet Union on Christmas Day 1991. The 1993 tax increase left the U.S. as the leading free-market economy, albeit at a smaller margin than before.

As we enter 2009, the U.S. position in the world is extremely different than it was 16 years earlier. We are no longer the low-tax beacon of the major industrialized world. Numerous countries in Western Europe, Eastern Europe, Asia and elsewhere now have lower capital gains taxes than the U.S. The same goes for top marginal income tax rates, where Albania is at 10%, Estonia 13% and Russia 17%, just to mention a few. Here in the U.S., the current top rate is 36% for Federal, and if you live in NYC or California, you probably pay very close to 50% all-in. Our 15% long-term capital gains tax can't compete with the 0% rates in many other countries, but don't forget that many capital gains taxes aren't long-term, at which point you will pay 36% or higher.

The effect of the current high-tax policies is becoming an increasing disaster. There has been no employment growth in places such as Silicon Valley in the last decade, because U.S. companies are choosing to locate more employees in lower-tax areas such as China, India and Eastern Europe. Have you noticed the lack of IPOs in the U.S. this year? For the first time in 30 years, there were no venture-backed IPOs. This has a significant impact to the standard of living here at home.

In this context, it is strange to listen to Senator McCain saying repeatedly that he wants to "Keep taxes low." Well, if taxes aren't low, why does he want to keep them? We have some of the world's highest capital gains and income taxes, so we are hemorrhaging investments and human capital to those places where they are not taxed as much.

So what is the 2009 recipe to strengthen the U.S. economy? Clearly McCain is wrong about "keeping taxes low" because they are already way too high. As for Obama, he proposes an outright train wreck in terms of forcing investors, businesses and high-wage earners abroad. Rather, we should once and for all abolish the capital gains tax – whether for short-term gains, or long-term. We should also become competitive with the fastest-growing economies in the world by cutting the top Federal rate to below Albania's 10% rate. Given that some U.S. states and local governments have combined rates of around 10%, it would be appropriate to abolish our Federal income tax altogether. This would stop the hemorrhaging of investments, businesses and talented individuals leaving our country.

What about the budget deficit, you say? Wouldn't abolishing the income tax and capital gains taxes reduce tax revenue? Of course it would. So the answer is to cut government spending correspondingly. The Federal budget now exceeds $3 trillion, or $10,000 per U.S. citizen, of which the Department of Defense is little over 20%. Big ticket items are Medicare, Medicaid and Social Security, for starters. Medicare and Medicaid in particular, are hugely inefficient and unnecessarily bureaucratic ways to induce people to over-consume health care services, and should be abolished in favor of lower taxes that would lead to a booming economy. The list goes on, but the Federal budget can be cut from over $3 billion to around $2 billion immediately, followed by another cut down to $1 trillion over time as Social Security payments dwindle in favor of a private 401(k)-style private system. The government can also raise funds by selling property, including land. After all, various agencies of the U.S. government is by far the largest property owner in the country, and could fill several years worth of budget gaps by auctioning off vast amounts of lands and buildings no longer necessary when we cut off the bureaucracy and the socialist apparatus currently consuming our tax dollars.