mercredi 17 juin 2009

"Russian Flat Tax Myth and Fact"

 
 

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via Economist's View de Mark Thoma le 16/06/09

Do tax cuts increase productivity?:

Study separates Russian flat tax myth and fact. EurekAlert: Proponents of a flat rate income tax often point to Russia's 2001 switch to a 13 percent flat tax as nothing short of an economic miracle.

The new tax policy slashed taxes for higher-income Russians who previously paid rates of 20 and 30 percent. Despite the savings to taxpayers, real tax revenues reaped by the government increased by 25 percent in the year after the reform. The windfall, flat tax advocates say, happened because a simpler, fairer tax system leads to better compliance, and because lower taxes spur productivity.

That assessment is half right, according to a study published this month in the Journal or Political Economy. The study by economists Yuriy Gorodnichenko (University of California, Berkeley), Jorge Martinez-Vazquez and Klara Sabirianova Peter (both of Georgia State University) looked at household level data to see how tax reform influenced tax evasion and real income. The study found that tax evasion decreased under the flat tax, but the reform did little to increase real income for taxpayers.

The lesson? Where underreporting of income is widespread, a flat tax can produce a revenue increase, but don't expect massive economic productivity gains.

Tax evasion by nature is tough to quantify. To get an estimate of the extent to which Russians hide income from the tax collector, the researchers used what they call the "consumption-income gap." They gathered data from household surveys conducted in 1998 and from 2000 to 2004 by the University of North Carolina. The surveys asked respondents to catalog their monthly spending on everything from food to entertainment. The data from these surveys show that Russians generally spend 30 percent more than they report receiving in income. It's unlikely that households are getting the extra buying power by dipping into savings accounts, because most of those surveyed had little or no savings. So the gap between household consumption and reported income is largely explained by an underreporting of income.

Looking at the survey data over time, the researchers found that the consumption-income gap shrank substantially in the years after the tax reform. In other words, the amount of income Russians reported got closer to the amount they spent. This effect was strongest for households who had been in the highest tax brackets before the reform. That's a good indication that the flat tax was directly responsible for decreasing tax evasion in Russia.

The other implication in these data is that the flat tax seems to have done little to increase real income for taxpayers. If real income had increased substantially, one would expect consumption to increase as well. That wasn't the case. Taxpayers whose tax rates were cut increased their consumption net of windfall gains by less than 4 percent.

"The results of this paper have several important policy implications," the authors write.

"The adoption of a flat rate income tax is not expected to lead to significant increases in tax revenues because the productivity response is shown to be fairly small. However, if the economy is plagued by ubiquitous tax evasion, as was the case in Russia, the flat rate income tax reform can lead to substantial revenue gains via increases in voluntary compliance."

The lack of a significant productivity response undercuts the main supply-side argument that cuts in taxes produce increased growth in output that generates a partial offset (some even argue a more than full offset) to the revenue lost from the tax cut. So many supply-siders have switched to the compliance argument for the US, but I doubt this effect would be large, and certainly not large enough to pay for the tax cut, and compliance can be increased in other ways such as closing loopholes and better enforcement of existing tax law.


 
 

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"A Long Way to Inflation"

 
 

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via Economist's View de Mark Thoma le 17/06/09

Andy Harless says we're not even close to experiencing an outbreak of inflation:

A Long Way to Inflation, by Andy Harless: Most of the media seem to have interpreted today's lower-than-expected increase in the producer price index as good news. ... Personally, I was more worried about deflation, and I still am. The inflation risk, if it exists at all, is in the distant future, and you could even argue that deflation in the short run increases the risk of high inflation in the long run. It's hard for me to see how falling prices today are good news at all. And prices – excluding food and energy – did fall in May according to the PPI.

You might worry about energy and commodity prices feeding through to the broader price level. I'm worried about that too, but not in the way you might think. Undoubtedly some of that feed-through is already happening, and it hasn't been enough to keep core producer price growth on the positive side of zero. I'm worried about what happens when commodity prices (1) stop rising (which they must do eventually) and/or (2) start falling again (which they may well do if the recent increases have been driven largely by unsustainable forces such as stockpiling by China). If core prices are already falling, and only energy prices are keeping the overall PPI inflation rate positive, what happens when energy prices stop rising?

What worries me particularly is that about 70% of the costs of production go to labor, and the forces of deflation work very slowly in the labor market. ... Wage growth is decelerating, and, based on all historical experience, the deceleration is likely to continue – in this case, to continue to the point where it becomes deflationary.

I'm not talking about what will happen in the next 6 months; I'm talking about what will happen over the next 5 years. "Green shoots" – however green they may be – do not presage an imminent end to deflationary wage pressure. And they certainly don't presage the beginning of inflationary wage pressure. Consider everything that has to happen before the wage pressure reverses and becomes inflationary:

  1. Output must stabilize.
  2. Output must start growing.
  3. Output must grow faster than trend productivity.
  4. Firms must slow layoffs to the normal rate.
  5. Firms must remobilize slack full-time employees (workers who are still on the full-time payroll but aren't being asked to produce much, because businesses have been trying to reduce inventories).
  6. Firms must bring part-time employees back to full time. (This recession in particular has been characterized by the tendency to reduce hours rather than laying off employees.)
  7. Hiring (which has been falling rapidly) must stabilize.
  8. Hiring must rise to the point where it equals the normal rate of layoffs, to get total employment to start rising.
  9. Hiring must become rapid enough that employment starts to grow faster than the population.
  10. Hiring must become rapid enough that employment growth is faster than the sum of the population growth & labor force re-entry. In other words, net hiring has to be fast enough to absorb all the workers who will start looking for jobs again once there are more jobs around to look for.
  11. The unemployment rate must start declining.
  12. The unemployment rate must decline by 4 or more percentage points, which, by historical experience, will take a matter of years.
  13. Firms must start competing for labor.
  14. Firms must start raising wages.
  15. Firms must raise wages faster than trend productivity growth.

Maybe – just maybe – we have already reached step 1. Step 2 may be just around the corner. There is no evidence thus far that we are approaching step 3. As for steps 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, and 15......that show may come to town eventually, but...I don't see much need to start reserving tickets in advance.


 
 

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mardi 16 juin 2009

Re-Interpreting the Blinder Numbers in the Light of New Trade Theory

 
 

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via Economist's View de Mark Thoma le 16/06/09

According to this, "the US is actually a net insourcer" of jobs:

How many jobs are onshorable? Re-interpreting the Blinder numbers in the light of new trade theory, by Richard Baldwin, Vox EU: Before the global crisis hit, offshoring was one of the scarcest things on rich nations' economic radar screens – especially the offshoring of "good" service sector jobs. Alan Blinder was one of the first to point out the threat in his 2006 Foreign Affairs article "Offshoring: The Next Industrial Revolution?" He wrote: "constant improvements in technology and global communications virtually guarantee that the future will bring much more offshoring of 'impersonal services''— that is, services that can be delivered electronically over long distances with little or no degradation in quality."

Blinder has more recently produced some estimates of the size of the revolution. And they make it look like "the big one". Blinder (2009): "I estimated that 30 million to 40 million US jobs are potentially offshorable."

This sort of media-friendly statement is part of what I consider to be very confused thinking by non-specialists – not that the economists involved are necessarily confused, but tacitly or not, they are allowing the media to misinterpret the numbers.

Let me start off by saying that I consider Alan Blinder to be one of the world's leading macroeconomic policy specialists. Moreover, I greatly appreciate the way he uses his knowledge of economics to make this a better world (rather than focusing entirely on impressing the other inhabitants of academe). This time, however, I'm not sure it has worked out right.

I don't wish to take issue with his numbers or methods. I wish to question the implications of those numbers. The trouble is that his numbers are being interpreted in the light of the "old paradigm" of globalisation – the world of trade theory that existed before Paul Krugman, Elhanan Helpman, and others led the "new trade theory" revolution in the 1980s.

The new trade theory: Micro, not macro, determinants of comparative advantage

Krugman's contribution, which was rewarded with a Nobel Prize in 2008, was to crystallise the profession's thinking on two-way trade in similar goods.[1] This was a revolution since the pre-Krugman received wisdom assumed away such trade or misunderstood its importance. In 1968, for example, Harvard economist Richard Cooper noted the rapid rise in two-way trade among similar nations and blamed it for the difficulty of maintaining fixed exchange rates. Using the prevailing trade theory orthodoxy, he asserted that this sort of trade could not be welfare-enhancing. And since it wasn't helping, he suggested that it should be taxed to make it easier to maintain the world's fixed exchange rate system – a goal that he considered to be the really important thing from a welfare and policy perspective (Cooper, 1968).

Trade economists back then took it as an article of faith that trade flows are caused by macro-level differences between nations – for example, national differences between the cost of capital versus labour. Nations that had relatively low labour costs exported relatively labour intensive goods to nations where labour was relatively expensive.

This is the traditional view that Blinder seems to be embracing.

What Krugman (especially Krugman 1979, 1980) showed was that one does not need macro-level differences to generate trade. Firm-level differences will do.

In a world of differentiated products (and services are a good example of this), scale economies can create firm-specific competitiveness, even between nations with identical macro-level determinants of comparative advantage. Krugman, a pure theorist at the time, assumed that nation's were identical in every aspect in order focus on the novel element in his theory (and to shock the "trade is caused by national differences" traditionalists). His insight, however, extends effortlessly to nations that also have macro-level differences, like the US and India.

This brings us to interpreting Blinder's 30 to 40 million offshorable jobs.

Blinder's calculations

Blinder's approach is easy to explain – a fact that accounts for much of its allure as well as its shortcomings.

  • Step 1 is to note that Indian wages are a fraction of US wages.
  • Step 1a is to implicitly assume that Indians' productivity-adjusted wages are also below those of US service sector workers, at least in tradable services.
  • Step 2, and this is where Blinder focused his efforts, is to note that advancing information and communication technology makes many more services tradable. The key characteristic, Blinder claims, is the ease with which the service can be delivered to the end-user electronically over long distances.
  • Step 3 (the critical unstated assumption, if not by Blinder, at least by the media reporting his results) is that the new trade in services will obey the pre-Krugman trade paradigm – it will largely be one-way trade. Nations with relatively low labour costs (read: India) will export relatively labour-intensive goods (read: tradable services) to nations where labour is relatively expensive (read: the US).

The catch

This last step is factually incorrect, as recent work by Mary Amiti and Shang-Jin Wei (2005) has shown. They note: "Like trade in goods, trade in services is a two-way street. Most countries receive outsourcing of services from other countries as well as outsource to other countries."

Voxoutin

Source: Author's manipulation of data from Amiti and Wei (2005), originally from IMF sources on trade in services.

The US, as it turns out, is a net "insourcer". That is, the world sends more service sector jobs to the US than the US sends to the world, where the jobs under discussion involve trade in services of computing (which includes computer software designs) and other business services (which include accounting and other back-office operations).

The chart shows the facts for the 1980 to 2003 period. We see that Blinder is right in that the US importing an ever-growing range of commercial services – or as he would say, the third industrial revolution has resulted in the offshoring of ever more service sector jobs. However, the US is also "insourcing" an ever-growing number of service sector jobs via its growing service exports. The startling fact is that not only is the trade not a one-way ticket to job destruction, the US is actually running a surplus.

Conclusion

None of this should be unexpected. The post-war liberalisation of global trade in manufactures created new opportunities and new challenges. To apply Blinder's logic to, say, the European car industry in the early 1960s, one would have had to claim that since the German car industry (at the time) faced much lower productivity-adjusted wages, freer trade would make most French auto jobs "lose-able" to import competition. Of course, many jobs were lost when trade did open up, but many more were created. As it turned out, micro-level factors allowed some French firms to thrive while others floundered, and the same happened in Germany. Surely the same sort of thing will happen in services, as trade barriers in that sector fall with advancing information and communication technologies.

In short, what Blinders' numbers tell us is that a great deal of trade will be created in services. Since services are highly differentiated products, and indivisibilities limit head-to-head competition, my guess is that we shall see a continuation of the trends in the chart. Lots more service jobs "offshored" and lots more "onshored". What governments should be doing is helping their service exporters to compete, not wringing their hands about one-way competition from low-wage nations.

Footnotes

1 Full disclosure: Krugman was my PhD thesis supervisor and we have coauthored a half-dozen articles since 1986.

References

Amiti, M. and S.J. Wei (2005), "Fear of Service Outsourcing: Is it Justified?", Economic Policy, 20, pp. 308-348.

Blinder, Alan (2006). "Offshoring: The Next Industrial Revolution?" Foreign Affairs, Volume 85, Number 2.

Blinder, Alan (2009). "How Many U.S. Jobs Might Be Offshorable," World Economy, 2009, forthcoming.

Cooper, R. (1968). The Economics of Interdependence. New York: McGraw-Hill.

Grossman, G. and E. Rossi-Hansberg (2006a). "The Rise of Offshoring: It's Not Wine for Cloth Anymore," July 2006. Paper presented at Kansas Fed's Jackson Hole conference for Central Bankers.

Krugman, Paul (1979). "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479,

Krugman, Paul (1980). "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, vol. 70(5), pages 950-59, December.

Krugman, Paul (1991), "Increasing Returns and Economic Geography", Journal of Political Economy 99, 483-499.


 
 

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lundi 8 juin 2009

Insufficient Innovation: Where are the New Products?

Les TIC en offrent une illustration en réduction :
- il y a trente ans : le PC,
- il y a 20 and : internet
- il y a dix ans : l'explosion du web,
- aujourd'hui : facebook & twitter

Loi des rendements décroissants ou je ne m'y connais pas

 
 

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via Paul Kedrosky's Infectious Greed de pk le 04/06/09

Interesting piece by Michael Mandel making a case I've made idly in the past -- that maybe a cause of our current predicament is insufficient innovation. Really.

The gist: We have convinced ourselves that we live in revolutionary innovative times, but we have much less to show for it than we should. In a sense, we staffed up for the coming rush of new-new things -- took on credit, hired like mad, and spent wildly anticipating growth -- only to find that new products took much longer coming than anyone expected. As a result, the binge left us a tottering and insolvent mess.

Read this excerpt from Mandel's piece:

But there's growing evidence that the innovation shortfall of the past decade is not only real but may also have contributed to today's financial crisis. Think back to 1998, the early days of the dot-com bubble. At the time, the news was filled with reports of startling breakthroughs in science and medicine, from new cancer treatments and gene therapies that promised to cure intractable diseases to high-speed satellite Internet, cars powered by fuel cells, micromachines on chips, and even cloning. These technologies seemed to be commercializing at "Internet speed," creating companies and drawing in enormous investments from profit-seeking venture capitalists—and ordinarily cautious corporate giants. Federal Reserve Chairman Alan Greenspan summed it up in a 2000 speech: "We appear to be in the midst of a period of rapid innovation that is bringing with it substantial and lasting benefits to our economy."

With the hindsight of a decade, one thing is abundantly clear: The commercial impact of most of those breakthroughs fell far short of expectations—not just in the U.S. but around the world. No gene therapy has yet been approved for sale in the U.S. Rural dwellers can get satellite Internet, but it's far slower, with longer lag times, than the ambitious satellite services that were being developed a decade ago. The economics of alternative energy haven't changed much. And while the biotech industry has continued to grow and produce important drugs—such as Avastin and Gleevec, which are used to fight cancer—the gains in health as a whole have been disappointing, given the enormous sums invested in research. As Gary P. Pisano, a Harvard Business School expert on the biotech business, observes: "It was a much harder road commercially than anyone believed."

If the reality of innovation was less than the perception, that helps explain why America's apparent boom was built on borrowing. The information technology revolution is worth cheering about, but it isn't sufficient by itself to sustain strong growth—especially since much of the actual production of tech gear shifted to Asia. With far fewer breakthrough products than expected, Americans had little new to sell to the rest of the world. Exports stagnated, stuck at around 11% of gross domestic product until 2006, while imports soared. That forced the U.S. to borrow trillions of dollars from overseas. The same surges of imports and borrowing also distorted economic statistics so that growth from 1998 to 2007, rather than averaging 2.7% per year, may have been closer to 2.3% per year. While Wall Street's mistakes may have triggered the financial crisis, the innovation shortfall helps explain why the collapse has been so broad.

More here.


 
 

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vendredi 29 mai 2009

Google Wave Drips With Ambition. A New Communication Platform For A New Web.

Ca c'est autre chose que twitter... Comment font ils chez google pour rester aussi créatifs, et aussi constamment excellents ?? l'anti Microsoft en tous points.

 
 

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via TechCrunch de MG Siegler le 28/05/09

google_wave_logoYesterday, during the Google I/O keynote, Google's VP of Engineering, Vic Gundotra, laid out a grand vision for the direction Google sees the web heading towards with the move to the HTML 5 standard. While we're not there yet, all the major browser players besides Microsoft are aligned and ready for the next phase, which will include such things as the ability to run 3D games and movies in the browser without additional plug-ins. But Google wants to take it one step further with a brand new method of communication for this new era. It's called Google Wave.

Everyone uses email and instant messaging on the web now, but imagine if you could tie those two forms of communication together and add a load of functionality on top of it. At its most fundamental form, that's essentially what Wave is. Developed by brothers Lars and Jens Rasmussen and Stephanie Hannon out of Google's Sydney, Australia offices, Wave was born out of the idea that email and instant messaging, as successful as they still are, were both created a very long time ago. We now have a much more robust web full of content and brimming with a desire to share stuff. Or as Lars Rasumussen put it, "Wave is what email would look like if it were invented today."

Having seen a lengthy demonstration, as ridiculous as it may sound, I have to agree. Wave offers a very sleek and easy way to navigate and participate in communication on the web that makes both email and instant messaging look stale. The much better comparison is coincidentally the company started by another group of (former) Googlers, FriendFeed. But Wave is a different product for a number of reasons, and seemingly has loftier goals — all of which I'll touch on below.

google_wave_snapshots_inbox

Features

During our demonstration, the Wave team kept reiterating that the product is still basically in its infancy. While it was born out of an idea Jens Rasmussen had in 2004, it was placed on the back-burner (while he and brother Lars got busy building what would eventually become Google Maps), only to be resurrected in 2007, and finally set free for internal testing only a few months ago. The reason Google kept reiterating this is because the feature set as it exists right now is just a sliver of what they intend it to be eventually. That said, there's already plenty to do.

Wave features a left-hand sidebar "Navigation" and a list of your contacts, from Google Contacts, below that. But the main part of the screen is your Wave inbox. This looks similar to what your Gmail inbox looks like except it feature the faces of your friends who are involved in each thread. There are also number indicators signifying if there is new content in that thread. This is an important distinction from Gmail — it isn't just about new messages, there can be any kind of new content in these waves.

Clicking on any of the wave threads will open another pane to the right of the inbox that shows that wave in its entirety. Let's say one wave is a message from a friend and you want to reply to it. If they're not currently online, you can do it below their message just as you may in Gmail. Except there's no bulky new message creator to pop open, you simply start typing below your friend's message. But perhaps you want to respond to a particular part of their message — well you can do that too simply by starting to type below the part you're replying to.

Maybe you want to add another friend to the wave. You can do that by going over to your contact box and dragging their picture into the wave. This is where things really start to get interesting. If that friend wants to get caught up on what everyone else in the wave has already been talking about, they can do so by using the "Playback" feature. This is sort of like rewinding the wave to see what has happened in the past and you can watch it progress through its changes.

google_wave_concurrent_edit

But if two of the people involved in the wave are online at the same time, you can talk to each other in real time, all in the same wave. Simply start typing, and your friend will see words as you enter them, and vice versa. This is the element that's like instant messaging obviously, but the key is that it's just a small part of what potentially makes up a wave conversation. And if you don't like the idea of real-time communication where the other person can see what you are typing as you type, you can enter a "Draft" mode to hide your words until you're ready to send them.

And say there is one person in a multi-person thread that you want to message privately. You can easily break-off a private conversation in the wave. Obviously, only you and the other recipient would be able to see this message, but for the both of you it would remain in the flow of the wave itself, keeping it in context.

But Wave is hardly just about traditional styles of messaging and replying that we've become accustomed to with email and IM. You can also edit things wiki-style with concurrent group collaboration. As anyone who has ever tried to group-edit a document on something like Google Docs knows, this can get tricky fast. But Wave offers a nice UI and real-time edit updates to ensure that even a few people editing something in a wave don't step all over each other. When someone is editing something, you see their name outlined by a brightly colored box next to the edits they are making in real-time. If you get confused, you can just use the Playback feature I described above to jump around and see the edits.

And from here we go much deeper. Say you want to share some recent photos on Wave, if you have a browser with Gears installed, all you have to do is drag and drop the pictures right into the Wave window. It's worth noting that this is the one Achilles heel keeping Wave from being fully functional with the "modern" web browsers (Firefox, Chrome, Safari and Opera) without any additional add-ons. ("Modern" is Google's passive aggressive way of calling out Microsoft's Internet Explorer.) Google says it would like to see such functionality added to the HTML 5 standards because it really simplifies this type of sharing.

google_wave_yes_no_maybe_inbox

And it's pretty damn cool. If you share pictures in a wave thread with several other people, from the moment after you drag the photos into the wave on your end, your friends can see the thumbnails of them on their screen. Everyone in the wave can collaborate to change the titles of the pictures, and you can view things like a slideshow of the images.

But pictures are just the beginning. Other example of things you can share in Wave include Google Maps (that you can edit), games, event invitations, and more. And those are just the examples the Wave team itself has thought of. Which brings us to the next point of Wave.

Wave As Web Communication

Google isn't just thinking of Wave as another web app that it creates and you use on one site — it wants you to be able to use it across all sites on the web. Say, for example, you have a blog. As a post, you could share a wave with the public and allow others to see what you and the other people in your wave are doing. And these visitors to your blog could even join in as well right from your blog, and all the information would be placed right into the original wave.

This could work a few ways. Either you could enable anonymous collaboration on the wave on your site, offer users the ability to sign-in with a certain method you already have on your site, like a comment user name, or they could sign in and interact with their Wave/Google name. We asked about using something like Facebook Connect as a method by which you could edit a wave, and though Lars Rasmussen said they hadn't yet worked on anything specifically for such functionality, they are very much thinking about it — though you can be sure that Google would prefer Friend Connect.

Waves can also be published as their own entities on the web. This would make them and their content indexable by Google's bots. But the Wave team is careful to note that if something is published to the public on the web, there's a big indicator of that within the wave that you may see in your main Wave pane.

google_wave_inbox_chess

And it's not just blogs that Google wants Wave on, it's pretty much any type of site you can imagine. And for a lot of different uses. For example, plenty of companies user some type of management system for communication beyond email or IM. We use Yammer, and when I was with VentureBeat, we used a FriendFeed private room. Yammer is good but it is just basically Twitter on your own system. The FriendFeed room is much more dynamic, but FriendFeed hosts that. Wave could offer the best of both worlds, and they're all for companies or even individuals hosting Waves on their own servers.

That's one of the keys to this entire idea. Google doesn't want Wave to be another one of its apps, it wants Wave to be a communication platform that it may have started, but flourishes all over the web in a bunch of different places. Which brings up the next point.

Developers, Developers, Developers

Gundotra, who used to work for Microsoft, cited Bill Gates' early insistence on having a robust developer community as one of the keys to the success of Windows. (And we all know what current CEO Steve Ballmer thinks about developers.) That same emphasis on developers is helping newer platforms like Android and the iPhone grow. And if Wave is to be successful, the entire team knows it will once again be because of developers.

While the Rasmussen brothers and Hannon, along with some 50 developers now working on the project at Google have built a very intriguing framework, it is just a taste of the potential of Wave if the development community embraces it. On Friday, Google will open Wave's APIs to developers to let them have at it. The hope is that in short order, there will be a ton of gadgets, extensions, mash-ups and interesting sites all built around the Wave concept.

google_wave_map_yes_no_maybe

The idea is to make the system as open for adoption as possible. The team wants to see Waves created by someone communicating with Waves created by someone else. "We want it to be an open system like email. We want other services to build Wave services even in competition with Google," Lars Rasmussen told us.

And with that in mind, Google plans to open source Wave. This will be the third phase of Google Wave. The first is Google Wave, the product, which Google creates, works on and eventually releases to the public as a web app. The second is Google Wave, the platform, which we outlined above as a system in place for developers to get involved in and create things for. But the third aspect is Google Wave, the protocol, which is its existence as a web communication platform. Find out more at the Waveprotocol.org site.

Because it will be open sourced (as Google gets it ready for a public release), it won't be just Google that is in charge of what it becomes. As it has been doing with Android, it will largely be the development community that dictates where it goes. Or, at least, that's the hope.

A New Web

So, if you've read this far, you're probably thinking that Wave either sounds great or you're confused as to what it exactly is. It really is one of those products that you have to see in action to understand. Unfortunately, unless you're a developer, you're not going to be able to see it right away. As we noted at the beginning, Wave is still in its early stages, but Google sees enough promise in it that it wants to get the developer community involved as early as possible — and that's why we're seeing it launch at Google I/O.

It's also important to note that Wave is very much centered around the key fundamentals Google is focusing on with HTML 5: The canvas element, the video element, geolocation, App Cache and Database and Web Workers. You can read more about those on O'Reilly Radar or in our live coverage from yesterday, but one of the keys for Wave will be the Web Workers. This capability allows you to run background processes outside of the browser so it doesn't slow to a crawl which running very rich apps — which Wave is.

Web Workers helps turns the browser into a more full-fledged launch pad for the next generation of web apps. That was the main point of yesterday's keynote and today's provides the best example thus far of one of these new-style apps in Wave.

It's a really interesting concept, one that you really do need to see in action. It's ambitious as hell — which we love — but that also leaves it open to the possibility of it falling on its face. But that's how great products are born. And the potential reward is huge if Google has its way as the ringleader of the complete transition to our digital lives on the web.

google_wave_inbox_add

Update: We're sitting in the day 2 Google I/O keynote where the team is showing off Google Wave. There are a number of impressive features that we didn't even go into (yes, there's that much to this). One of my favorites is that not only is search real-time in Wave, but it's really live. For example, if you remove an 'e' from "Here" it will disappear from the results for that word. Likewise, if you add the "e" back on, it will pop up again — instantaneously.

Another great feature is the advanced spell checker that not only looks through a dictionary for spelling, but looks for context in your sentence. It's crazy to think that this could work, but it does as they're showing it off.

And yes, Wave will work with Twitter. The team itself created a gadget for it that they call "Twave" that brings in tweets from your stream, complete with your contacts' Twitter icons. You can respond to these tweets from within Wave and they will go back to your Twitter stream. But the best feature is Twave's search feature which scans Twitter in real time and updates live when new results come in. You can use this to track anything you want in real-time.

Now the team is showing off a wave that can translate to other languages in real-time. Again, impressive.

The demo at Google I/O has just ended to huge standing ovation. If today is any indication, this is going to be big.

Update 2: And here's an interview we recorded with the creators of Google Wave. Hear them explain the product in their own words.

Update 3: And here's our coverage of the post-keynote press Q&A session.

Update 4: And finally, here's a video of the full demo from I/O today. You'll want to watch this if you're interested in Wave.

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jeudi 28 mai 2009

Zipf’s Law

 
 

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via Economist's View de Mark Thoma le 20/05/09

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Sizing up cities:

Math and the City, by Steven Strogatz: ...The mathematics of cities was launched in 1949 when George Zipf, a linguist working at Harvard,... noticed that if you tabulate the biggest cities in a given country and rank them according to their populations, the largest city is always about twice as big as the second largest, and three times as big as the third largest, and so on. In other words, the population of a city is, to a good approximation, inversely proportional to its rank. Why this should be true, no one knows. ...

Given the different social conditions from country to country, the different patterns of migration a century ago and many other variables that you'd think would make a difference, the generality of Zipf's law is astonishing.

Keep in mind that this pattern emerged on its own. ... Many inventive theorists working in disciplines ranging from economics to physics have taken a whack at explaining Zipf's law, but no one has completely solved it. Paul Krugman ... wryly noted that "the usual complaint about economic theory is that our models are oversimplified — that they offer excessively neat views of complex, messy reality. [In the case of Zipf's law] the reverse is true: we have complex, messy models, yet reality is startlingly neat and simple." ...

Around 2006, scientists started discovering new mathematical laws about cities that are nearly as stunning as Zipf's. ... For instance,... populous ... cities have more gas stations than smaller ones (of course), but not nearly in direct proportion to their size. The number of gas stations grows only in proportion to the 0.77 power of population. The crucial thing is that 0.77 is less than 1. This implies that ... bigger cities enjoy economies of scale. In this sense, bigger is greener.

The same pattern holds for other measures of infrastructure. Whether you measure miles of roadway or length of electrical cables, you find that all ... show an exponent between 0.7 and 0.9. Now comes the spooky part. The same law is true for living things. That is, if you mentally replace cities by organisms and city size by body weight, the mathematical pattern remains the same.

For example, suppose you measure how many calories a mouse burns per day, compared to an elephant. ... The relevant law of metabolism, called Kleiber's law, states that the metabolic needs of a mammal grow in proportion to its body weight raised to the 0.74 power.

This 0.74 power is uncannily close to the 0.77 observed for the law governing gas stations in cities. Coincidence? Maybe, but probably not. There are theoretical grounds to expect a power close to 3/4. Geoffrey West of the Santa Fe Institute and his colleagues Jim Brown and Brian Enquist have argued that a 3/4-power law is exactly what you'd expect if natural selection has evolved a transport system for conveying energy and nutrients as efficiently and rapidly as possible to all points of a three-dimensional body, using a fractal network built from a series of branching tubes — precisely the architecture seen in the circulatory system and the airways of the lung, and not too different from the roads and cables and pipes that keep a city alive.

These numerical coincidences seem to be telling us something profound. It appears that Aristotle's metaphor of a city as a living thing is more than merely poetic. There may be deep laws of collective organization at work here, the same laws for aggregates of people and cells. ...

[For more on city size, see: Why Has Globalization Led to Bigger Cities?, by Edward Glaeser.]


 
 

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lundi 25 mai 2009

Martin Wolf on the Need to Rein in Finance

MW a été brillant depuis le tout début de la crise, avec d'autant plus de mérite qu'il y parvient tout en étant à la fois britannique et éditorialiste au FT. Ces deux qualités ne sont a priori pas compatibles avec un examen critique du capitalisme financier de ces dernières années...

 
 

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via naked capitalism de Yves Smith le 21/05/09

I always enjoy reading the Financial Times' editor, Martin Wolf, but I sometime forget how refreshing and pointed he can be when he decides to let loose at a deserving target. Today's lesson is the almost ludicrous efforts of the financial services industry to explain why the debacle that they just foisted on all of us isn't sufficient cause to put it on a choke chain.

Wolf pillories a report produced by some leading lights of the UK's banking industry. Its main failing, as Wolf points out, is that the industry has already captured Alistair Darling, chancellor of the exchequer, who sponsored the effort and sat on the committee. The verdict was pre-deetermined: "to examine the competitiveness of financial services globally and to develop a framework on which to base policy and initiatives to keep UK financial services competitive".

Ulp. Darling lives in a parallel universe, preoccupied with saving the perps who took down the economy with their recklessness. But he is hardly alone in how badly he has been captured by the industry.

Wolf has a remarkably straightforward recommendation.. The industry produces extenalities, like polluters, so tax it. I've long been a fan of Tobin taxes without being able to prove my pet suspicion, that too much ease of trading benefits intermediaries more than the principals, by encouraging more speculation than is needed to lubricate markets. Wolf provides another rationale. And he dismisses the notion that innovation is ever and always good (radiation tonics were innovative too, and killed people) and that determined regulators cannot restrain big financial players.

From the Financial Times:
The UK has a strategic nightmare: it has a strong comparative advantage in the world's most irresponsible industry. So now, in the wake of the biggest financial crisis since the 1930s, the UK must ask itself a painful question: how should the country manage the cuckoo sitting in its nest?

The question is inescapable. London is one of the world's two most important centres of global finance. Its regulators have, as a result, an influence on the world economy out of proportion to the country's size. In the years leading up to the crisis, that influence was surely malign: the "light touch" approach led the way in a regulatory race to the bottom.

The fiscal costs of this crisis will be comparable to those of a big war....Loss of jobs and incomes will also scar the lives of hundreds of millions of people around the world.

All this occurred, in part, because institutions replete with highly qualified and highly rewarded people were unable or unwilling to manage risk responsibly....This is a time for self-examination.

A recent report on the future of UK international financial services...fails to provide such self-examination...the report's remit was "to examine the competitiveness of financial services globally and to develop a framework on which to base policy and initiatives to keep UK financial services competitive".

If you ask the wrong question, you will get the wrong answer. The right question is, instead, this: what framework is needed to ensure that the operation of the financial sector is compatible with the long-run health of the UK and world economies?

Quite simply, the sector imposes massive negative externalities (or costs) on bystanders. Thus, the recommendation "that the financial sector be allowed to recalibrate its activities according to the sentiments and demands of the market" is wrong. A market works well if, and only if, decision-makers confront the consequences of their decisions. This is not – and probably cannot be – the case in finance: certainly, people now sit on fortunes earned in activities that have led to unprecedented rescues and the worst recession since the 1930s. Given this, the industry has become too big. If implicit and explicit guarantees and externalities, including volatility, were fully charged, the sector would surely shrink.

So how should one manage a sector that produces such "bads"? The answer is: in the same way as any polluting activity. One taxes it. At this point, the authors of the report will surely ask: "How can you suggest taxing a sector so vital to the UK economy?" The answer is: easily. Financial services generate only 8 per cent of gross domestic product. They are more important for taxation and the balance of payments. But this tax revenue turns out to be perilously volatile. True, in 2007, the last year before the crisis, the UK ran a trade surplus of £37bn in financial services, partially offsetting an £89bn deficit in goods. But smaller net earnings from financial services would have generated a lower real exchange rate and more earnings elsewhere. Given the costs imposed by the financial sector, a more diversified economy would have been healthier. Such sacrilegious ideas are, of course, not to be found in the Bischoff report.

How then should the UK approach policy towards the sector? I would suggest the following guiding ideas.

First, the UK needs to make global regulation work. It should discourage regulatory arbitrage even if it expects to gain in the short run.

Second, it must, in particular, help ensure that owners and managers of financial institutions internalise most of the costs of their actions.

Third, it must reject egregious special pleading from the industry. The sector argues that moving derivatives trading on to exchangesmight damage innovation. So what? Maximising innovation is a crazy objective. As in pharmaceuticals, a trade-off exists between innovation and safety. If institutions threaten to take trading activities offshore, banking licences should be revoked.

Fourth, while trying to create a stable and favourable environment for business activities, the UK should try to diversify the economy away from finance, not reinforce its overly strong comparative advantage within it.

Fifth, UK authorities need to ensure that the risks run by institutions they guarantee fall within the financial and regulatory capacity of the British state. They should not let the country be exposed to the risks created by inadequately supported and under-regulated foreign institutions. At the very least, they should not undermine other governments' efforts to regulate their own institutions.

The "old normal" was simply unsustainable. The "new normal" must be very different. It is far from clear that the industry and government recognise this grim truth.

 
 

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mercredi 20 mai 2009

A Right Skewering

 
 

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via Financial Armageddon de panzner le 19/05/09

When it comes to skewering individuals and institutions with language, those who come from "across the pond" are in a class of their own. Though I'm not quite sure why the British are so adept at wielding carefully chosen words like razor-edged swords -- perhaps it stems from a unique combination of education, cultural rigidity, social reticence, and moral superiority -- it is often a sight to behold (unless, of course, you happen to be on the receiving end).

Whatever the reasons, one English-born banker and journalist who uses words so effectively to cut through the gobbledy gook of modern finance and economics is Martin Hutchinson, author of Great Conservatives, contributing editor to the Money Map Report and Money Morning, and author of the weekly "Bear's Lair" column at Prudentbear.com.

In his latest commentary, "The Wreck of Modern Finance," Hutchinson does a mesmerizing job of calling to task some of the "experts" (and their theories) who helped get us to where we are now.

Over the last 30 years, the capital markets have been restructured through the tenets of modern finance in its various forms, which together have gained six Nobel Prizes (Modigliani, Sharpe, Markowitz, Miller, Merton, Scholes) and might have generated a couple more (Fama and Black.) This has been enormously profitable for the financial services sector, which has doubled its share of U.S. economic output. As we are only now coming to see, it has proved pretty well disastrous for the global economy as a whole.

The most fundamental error of the modern financial edifice was its assumption of randomness in market movements, without a true understanding of the conditions necessary for randomness to hold. The laws of probability and the idea of randomness were generated by the 17th century French mathematician Blaise Pascal, who used them to help in winning card games, roulette and other activities in which tiny physical variations cause a discrete change in results. Since tiny physical variations are themselves unpredictable, their results are truly random.

This true randomness almost never holds for economic activities. Some of them are governed by complex underlying equations, impossible for mediocre mathematicians to solve, which produce pseudo-random "chaotic" behavior, in which prices or other variables appear to move randomly but are in reality mostly determinate. The interaction between economic variables is partly random (itself partly caused by inadequacies in our ability to measure economic quantities quickly) and partly determined by these kinds of complex non-linearities.

Other economic variables are also not random, and may not be governed by discoverable laws; they are simply unknown. Next year's Gross Domestic Product, for example, is theoretically determinable from factors we could already know (plus a few random elements). But it is mostly not random; we simply do not know what it will be.

Pretending that deterministic (but chaotic) quantities or unknown quantities are random is a huge category error. If such quantities are not random, they will not obey the laws of randomness. In particular calculations that depend on the properties of randomness, such as Monte Carlo simulation, the Value at Risk methodology or the Black-Scholes options model will be quite simply wrong, often very badly wrong.

For non-random quantities, one of the most important properties of truly random quantities, the tendency of their distributions' "tails" to disappear at around three standard deviations from the mean, will not hold. In probability, the chance of four events happening is the product of their four probabilities; in fuzzy logic, the alternative analytical system for the unknown, the "belief" of four events is the minimum of their beliefs. If each event has a probability/belief of 1 in 10, it's the difference between 1 in 10,000 (random) and 1 in 10 (unknown).

Nassim Taleb in his best seller criticized Wall Street for being "Fooled by Randomess." He had it precisely wrong; in reality, Wall Street and the economists and "mathematicians" (mostly not very good ones, or good ones who figured out there was a problem but stayed around for the money) have been fooled by assuming randomness where it does not exist.

That assumption makes the equations easier to solve; random quantities tend to be linear, exponential or normal, the three types of equations economists know how to deal with. Chaotic quantities generally obey power-series equations, or even nastier ones, while unknown quantities by definition don't obey any equations at all.

Financial quantities, mostly a mixture of the chaotic and the unknown, are thus frightfully hard to model; one has some sympathy. Even Benoit Mandelbrot, a truly superior mathematician who invented fractal geometry, made devastating criticisms of others' models in his 2004 "The misbehavior of markets," but was unable to come up with a better alternative.

The invention of PCs, together with the intellectual "advances" of modern financial theory, from around 1980 caused an explosion of mathematical modeling on Wall Street. Models were used to price options, to value complex packages of securitized debt, to manage investments and above all, to manage risk, even being incorporated into the "Basel II" bank capital requirements.

In the "Value at Risk" risk management system, for example, the model calculates the maximum possible loss in 99% of periods covered. Even if the model worked, that would be a foolish way to manage risk for an entire bank when the periods are as short as a day or a month; 100 trading days is only five months and even 100 months is only eight years. While the 200 year life expectancies of the old merchant banks may have been excessively conservative, eight years is surely rather too short a life expectancy for banks if the market is to function soundly.

The VAR assumption, that even in the other 1% of periods the model wouldn't be too far wrong, is completely and dangerously false. When David Vinear, chief financial officer of Goldman Sachs, said in August 2007, "We were seeing things that were 25-standard-deviation events, several days in a row," he was condemning his risk management out of his own mouth. In a truly random system, 25-standard-deviation events would not just be rare, they would be literally impossible, of infinitesimal probability during the entire history of the universe.

Not only are price movements not random, the market is not "efficient." It is subject to bubbles and periods of depression – indeed one of the most profitable strategies during the latter, employed by the late Sir John Templeton and others, is to buy small out-of-the-way stocks at random, since analysts stop covering the lesser names when business is bad, and their prices drift down arbitrarily far. (Conversely, that's why many of the best investment managers, mostly invested in small stocks, did so badly in 2008, down 70% or 80% when the market overall was down only 40%; the market was de-arbitraging as the financial system fell apart.) As innumerable behavioral finance professors have demonstrated, expectations are not rational.

The Capital Asset Pricing Model also doesn't work, as many have found to their cost. On the corporate side, it combined with the tax-deductibility of debt interest and short-term oriented compensation systems to leave banks and corporations excessively leveraged. Lehman Brothers shareholders have lost more through bankruptcy than they previously gained through leverage; business failure is in itself an extremely expensive process. Of course, bailouts here, there and everywhere have mitigated the costs of owning, say, AIG or Citigroup shares, but on the other hand, being a debt-holder in Chrysler or General Motors has proved unexpectedly expensive, as the Obama administration has reallocated resources to its union friends. In the last six months, the resource allocation process has become almost entirely political, and will remain so until the U.S. government runs out of money, which fortunately shouldn't take too long.

On the investment side, the CAPM has led to the development of innumerable phony asset classes, whose returns were supposed to be uncorrelated to the stock market, but which were mostly notable for the hugely greater fees they provided to their sponsors. Hedge funds depend on excessive leverage and the continuance of misguided financial engineering; private equity funds depend on the existence of a thriving public market for takeout; and emerging markets funds depend on the health and liquidity of the world economy. None of them diversify risk more than marginally and all of them add huge new layers of cost. The Yale Model of investment management does not work – except for the lavishly rewarded investment managers who developed it.

Securitization appeared to be a mechanism that allowed banks to remove assets from their balance sheets, while providing relatively low-risk, liquid assets for investors. It also didn't work. First, banks were left with most of the residual risk, so allowing them to remove the assets from their balance sheets merely encouraged excessive leverage. Second, the ratings agencies assumed randomness of outcome in, say, pools of subprime mortgage assets, an assumption that proved to be laughably wrong. When mortgage underwriting standards deteriorated, they deteriorated everywhere, so all pools ended up with their share of almost-worthless "liar loans." Even when underwriting standards were maintained, real estate mortgage losses were not probabilistically independent, since a nationwide housing-price decline caused an ever-increasing cascade of losses, far beyond past experience. Housing and credit card loans are not probabilistically independent, because the business cycle isn't random; in a down cycle they all go wrong at once.

The largest nirvana for mathematically-generated profits was the derivatives markets. Here the "vanilla" markets were relatively sound, with risks manageable and finite. They were, however, almost infinitely arbitrageable, so became a trading desk heaven, with far too much volume for the contracts' real uses, endless speculative games played, and infinitesimal margins. Most important, they produced an explosion of counterparty risks so that even the dodgiest bank or broker active in the markets could not be allowed to go bust. That problem can largely be solved by President Obama's proposed legislation forcing standard derivatives to trade over recognized exchanges, eliminating most of the counterparty risk and concentrating the rest in one place.

In order to increase profits, traders devised more and more complex derivatives types, the management of which required dangerously false assumptions about randomness. These more complex contracts up-fronted most of their profit, leading to bonus bonanzas, while leaving their risks ticking like a time-bomb through their entire duration of several years – so we may not yet have seen all the loss explosions this business will produce.

Finally, there were credit default swaps (CDS). As derivatives, these were poorly designed, because their settlement rested on a primitive auction procedure that is itself gamed by the major dealers, who use it to extract rent from the U.S. government and any companies unfortunate enough to near bankruptcy. As we have recently seen in two cases, Abitibi-Price and General Growth Properties, CDS deviate even further than most derivatives from the theoretical efficient-market modern finance ideal in that they allow debt-holders to "game" the default process itself.

In essence, CDS holders, who if they are also bondholders can vote in the bankruptcy process, act like spectators at a suicide, yelling, "Jump! Jump!'' and pushing companies into default in order to reap bonanza profits from their CDS. This is particularly attractive if the CDS were issued by AIG and so effectively guaranteed by taxpayers.

CDS also act as highly efficient vehicles for short selling; their cost is so low in relation to their potential profit and their volume so large that they can provide huge incentives to unscrupulous speculators to drive viable companies over the edge – this was part of the problem at Lehman Brothers, for example.

In summary, the dangers of CDS are so out of proportion to their modest advantages as risk management tools that it seems wisest for the authorities to ban them altogether, not something I would normally recommend.

We gave poor Jeff Skilling of Enron 24 years in jail for inventing a new trading platform that turned out to be unsound. As we peer out from the wreckage that modern finance has left, one can't help thinking that there are a number of Nobelists who more deserve such Draconian punishment.


 
 

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lundi 18 mai 2009

Retirement in the US : lessons for France



 
 

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via The Big Money de mark.gimein le 15/05/09

"Our nation's system of retirement security is imperiled, headed for a serious train wreck.That wreck is not merely waiting to happen; we are running on a dangerous track that is leading directly to a serious crash that will disable major parts of our retirement system."

—John Bogle, Feb. 24, 2009

If several years before the financial and credit crisis hit someone had told you that the housing market was preposterously overvalued and derivatives were headed for cataclysm, would it have been worth paying attention to? The answer's pretty clearly yes, ain't it? Of course, some of the best minds in finance—from Warren Buffett to Yale housing economist Robert Shiller—did. It's just that hardly anyone listened.

Now there's another crisis building. It's just as big. Again, some of the best thinkers in the financial world are warning about it. (Yes, Buffett's one of them.) And yet again, as is often the case with gathering storms, most of us are doing our best to ignore the warning signs.

Americans lost almost one-quarter of their retirement savings last year. But even if there were no market drop, we'd still be facing a disaster in the making.

The urgent lines at the top of this story come from John Bogle, founder of the Vanguard group of mutual funds and father of the low-cost stock-index fund, the simplest and most cost-efficient tool yet devised for individual investing in stocks. Of all the people who've thought longest and best about individual investing, Bogle has to rank near the top. For decades before the financial crisis ripped open the country's retirement accounts, Bogle was tirelessly warning people away from their brokers' fads and follies.

Bogle's voice is now one of the loudest, most cogent of those calling for a rethinking of American retirement. He made the remarks above earlier this year to a congressional panel looking at the security of American savings. Like much of what is said about retirement, Bogle's words passed by without much attention. But much of what he has to say is seriously worth listening to.

Over the past two decades, we've embarked on what is essentially a novel experiment, replacing the pension plans of the past with a patchwork of individual accounts such as 401(k)s and IRAs. We had sound reasons for this: Letting people choose how much they save for retirement instead of counting on their employers to give them a decent pension if they put in enough time makes sense. But if the basic idea of personal responsibility for retirement is appealing to most, the reality is a lot thornier.

By this point, there is hardly anyone left who hasn't heard of a 401(k) or doesn't know that they should open one. With some tweaks in the rules for 401(k) enrollment, the Obama administration is hoping to get participation in individual retirement plans up to 80 percent of Americans.

The bad news from Bogle, though, is that the way it's set up now, the 401(k) isn't the panacea that policymakers on all sides of the spectrum hope it will be. What's wrong with the 401(k)?

* Simply having a retirement account is not enough. Much of the discussion this past year has focused on getting workers to open 401(k)s. The problem is that the big majority of retirement accounts don't really hold nearly enough money.

According to Bogle's numbers, the median IRA has $55,000 in it. By his calculations, that's enough to provide a steady income of $2,200 a year—less than $200 a month. That's it. And 401(k)s? The typical 401K holds only $15,000. Bogle argues that to reach the level of income they hope for in retirement, Americans need to put 15 percent of their earnings in retirement accounts for their entire working lives. Very few do.

* One of the biggest differences between individual accounts and traditional pension plans is that they transfer what Bogle calls "longevity risk" from pension funds to individuals. What that means in practice is that you need to save more—a lot more—in your account than a pension plan would include in order to cover the chance that you'll live to a very old age.

Right now, we have no good solution to this. In theory, you should be able to put your money into an annuity at retirement that'll cover this risk. But as Bogle points out, there are virtually no annuities that will let you do this at a low cost. So now your underfunded retirement account looks even worse.

* We all know the financial advice about putting retirement assets in safe investments as we grow older. But in practice, we don't come close to following it. The big majority of retirement fund assets are in equities. And it doesn't get much better for people approaching retirement: According to Bogle, 30 percent of them have 80 percent of their IRA investments in stocks.

What this means in practice is that some people (not many, Bogle thinks, as most people make terrible investment decisions) will do very well. And others, such as the people retiring this year in the wake of the massive stock market drop, will do very badly. It's what Bogle calls investment risk, and like longevity risk, moving from pension plans to 401(k)s and IRAs has transferred that from corporations to retirees.

Bogle proposes the beginnings of several solutions to our retirement problem. Clearly, finding ways to nudge people to put more money into retirement accounts is part of the answer. But it's only a small part. It does nothing for longevity risk and nothing to distribute investment risk. Pension funds did that: If you happened to retire the year the market crashed or if you lived to be 90 years old, that was OK, because your risks were shared with people who retired in other years or failed to live as long.

As it stands now, 401(k) plans do nothing for those risks. On the contrary, many of the bad practices that Americans have fallen into, such as putting much of their retirement money in their own employer's stock, exacerbate them.

Bogle points to several tools—the creation of annuities that would work a lot like pension plans to level investment and longevity risk—that would help give Americans the equipment they need to manage their retirement. But developing those tools and making them widely available right now just isn't on the political agenda. And Bogle (who wryly urges casting the "money changers" of Wall Street out of "the temple of finance") warns that we shouldn't expect them to come from the big financial companies.

We're already witnessing the beginnings of a retirement catastrophe now: You can see it if you look at the growing number of older Americans who have kept working into their 60s and 70s or gone back into the work force. Without a dramatic change not just in the amount of money that we save but in how we save, it will get much worse. In the 1980s, Britain launched what turned out to be a disastrous experiment in asking people to take responsibility for their retirement investments without giving them the tools to do it. We're now well on our way to repeating it on a much bigger scale.

Without it, we're facing a one-two punch in the retirement future. The left hook is the shortage of savings. The right hook is the added investment and longevity risk that the new model of retirement brings. It's a potential disaster as big as the mortgage and credit crisis. And as with those, if we get to it, folks in finance will be out in force, crying that nobody could possibly have seen it coming. That's just not true.


 
 

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