Timothy Taylor on the Tech Sector

He writes,

My own guess is that the applications for IT in the US economy will continue to be on the rise, probably in a dramatic fashion, and that many of those applications will turn out to be even more important for society than Twitter or Pokémon Go. The biggest gains in jobs won’t be the computer science researchers, but instead will be the people installing, applying, updating, and using IT in a enormously wide range of contexts. If your talents and inclinations lead this way, it remains a good area to work on picking up some additional skills.

This sounds right to me. The technological advances have been rapid, but the process of deploying applications goes more slowly.

The Privatization Opportunity

Chris Edwards writes,

Congress imposes a rigid monopoly on the nation so that we can continue to receive mainly “junk mail” in our mailboxes six days a week — while 205 billion emails blast around the planet every day. Retaining special protections for the government’s old-fashioned paper delivery system makes little sense.

He suggests privatizing the post office, as well as Amtrak, the TVA, government buildings, and many other government “businesses.” He does not even mention communications spectrum, much of which is restricted to government use and is wasted.

I found the paper depressing to read, because the case he makes is so compelling and the likelihood that privatization will take place appears to be so close to nil.

Daniel Yergin on The Great Regulation

He writes,

Voters under 30 were either very small or not yet born when the Berlin Wall came tumbling down in 1989. They have no memory of communism—what it meant in terms of poverty, thwarted opportunity and political repression. Closer to home, few Americans recall the likes of the now-defunct Civil Aeronautics Board, which not only set the price of an airline ticket but regulated the size of the in-flight sandwiches. What millennials do know is what happened in 2008—and for many it serves as an indictment of the market system.

The people want regulation and they are getting it–good and hard, as Mencken would say. The result?

if you want lifetime employment, go into compliance.

Thanks to a reader for the pointer. I used to say that if you want to start an automobile company in this country you need a handful of engineers–and at least 1000 lawyers. Starting an independent medical practice is getting to that point.

There may be natural forces at work that cause industries to become dominated by a few large players. But there is also the unnatural force of regulation.

The Great Regulation

Guy Rolnik writes,

Looking at both intangible investments and political activities to explain the 20% rise in Tobin’s q in the U.S. since 1970, a new working paper by James Bessen from Boston University concludes that activity associated with increased Federal regulation is the most important explanatory factor, especially after 2000. In fact, spending on R&D and other intangibles has fallen relative to conventional assets since 2000.

Noting that operating margins for these firms have also risen since 1990 by over 2% in aggregate, Bessen’s study also found that variables associated with regulation and corporate campaign contributions account for about half of this increase.

Pointer from Mark Thoma. The article is a long interview with Bessen, interesting throughout. For example,

In 2011 a new patent law passed, the Leahy-Smith America Invents Act. This patent law was essentially negotiated between a small number of large pharma companies and a small number of large tech companies.

…all of a sudden you have a whole lot of small businesses in every state in the country who are now upset about getting sued for patent infringement over these very ridiculous claims.

Once again, I wonder how much of the trend toward industry consolidation and loss of dynamism in the past twenty years is due to regulation and rent-seeking.

Eli Lehrer on Trends in Job Mobility

He writes,

Overall, employment patterns have shifted — in the direction of increased employment by big firms and a declining role for small businesses and the self-employed. Since 1993, the earliest year for which there is comparable data, the percentage of workers employed by small firms (one to four employees) has fallen slowly, but fairly consistently, from 5.6% to a bit under 5%. Meanwhile, the percentage of the workforce employed by firms with 1,000 or more workers has risen from 35.6% to 39.2%. Average tenure with the same employer has also risen in recent years, going from 4.9 years in 2004 to 5.5 years in 2014. The percentage of workers over 25 who have been with their current employer for more than a decade has also risen consistently, from 30.6% in 2004 to 33.3% in 2014. The percentage of people who are self-employed has steadily and consistently declined over the past several decades, falling from a high of about 7.3% in 1991 to 5.3% in 2015.

I wonder how this breaks down by industry. I would bet that the market share of small businesses has been declining in medical care, restaurants, and general retail. I assume that small farms have continued a downward trend.

Jason Furman’s Puzzle

He writes,

In the absence of economic rents, the return on corporate capital should generally follow the path of interest rates, which reflect the prevailing return to capital in the economy. But over the past three decades, the return to productive capital generally has risen, despite the large decline in yields on government bonds.

Pointer from Mark Thoma.

For a moment, think that there is just one interest rate. If “the” interest rate is low, then the rate of return on new capital ought to be low. Otherwise, firms would borrow at the low interest rate in order to purchase new capital.

One possibility is that the marginal return on new capital is low, but the returns on existing capital are high. That would be true in an economy where there are economic rents available, due to monopoly power and/or government favoritism. I gather that this is the story that Furman thinks is right.

I would note that there is more than one interest rate. It could be that there is a high interest rate charged to firms that are trying to invest in new capital at the margin. Microsoft can borrow at a low interest rate, but when it buys Linked-In that is not new capital investment.

Despite that possibility, my inclination is to believe that Furman is onto something. Read his whole essay.

Uber vs. DC Metro

According to Wikipedia,

Of those that work in Washington, D.C., 44.8% drive alone to work, 21.2% take Metro [the DC subway system], 14.4% carpool/slug, 8.8% use Metrobus, 4.5% walk to work, 2.7% travel by commuter rail, and 0.6% ride their bicycle to work.

Carpools are a pain to arrange and to maintain. But Uber offers a solution.

UberPool—the latest incarnation of Uber in New York City—works by finding users who are headed on similar routes and matching them up in cars that make multiple pickups and drop-offs. The service launched in New York last December and is also online in three other cities, but only started gaining traction here a few months ago, after Uber began advertising it heavily and promised UberPool riders steep fare cuts.

It seems to me that if Metro were to shut down completely, this sort of just-in-time carpooling could pick up the slack. I don’t know how the current system works, but I can imagine something like the following:

As a commuter, you wake up in the morning, and you decide that you will be ready to leave at, say, between 7:45 and 800 AM. You enter a price at which you would be indifferent between driving and collecting passengers or riding and paying the price. The system finds a price that balances supply and demand. If it’s above your price, then you drive and pick up other passengers, who pay you. If the market price is below your offer, then you ride and pay the driver who picks you up.

Unlike an old-fashioned carpool, every day you might come and go at different times, and every day you might have different people in the car with you.

This sort of a system would balance supply and demand. So if it were in place, then Metro could shut down and there would be no commuting disaster. Instead, some of those 44 percent who commute alone and some of those people who now take Metro would switch to these flexible carpools.

The system could reduce the number of cars on the road by offering a premium for picking up more than one passenger and a discount for being an extra passenger. The premium and the discount could depend on traffic conditions.

Contrast the flexibility and adaptability of such a system with Metro.

A Workable Phone Spam Filter?

A commenter writes,

I switched my landline to a VOIP service called ‘Callcentric’ years ago. It’s been great for me. Really cheap. Lets me block unwanted calls. Voice mails are sent to me as email attachments. Setting up the VOIP box initially require a little technical messing around, but that’s been the only drawback.

Several other commenters offered suggestions. I have some questions.

1. This seemed like the best solution to me. What are the worst drawbacks?

2. We have a phone on each floor of our house. Can we use one VOIP box with multiple phones?

3. Are there useful articles out there that describe the process of using VOIP for this purpose?

4. Are there useful articles out there about choosing a VOIP box?

Comments on Uber’s Value Proposition

A commenter writes,

It’s not that *SOFTWARE* suddenly let Uber and Lyft do things previously undreamt of so they took over the old fuddy-duddy cab business. It was a power play.

If one of the standard cab companies had wanted to operate like Uber, the city administration which licenses cabs would have shut them down immediately. Because “That isn’t how cab companies operate” and to hell with your fancy software and lineup of venture capitalists. But Uber never tried to operate as a cab company. It just merrily put up ads and flyers and signed up drivers and was happily ferrying passengers hither and yon while the established cab companies were trying to get somebody in city government to answer the damned phone and listen to a complaint. By the time the typical city bureaucracy reacts to the existence of Uber, it’s generally gotten itself established in most users’ minds as old and legitimate, and very few cities have the … anatomical features …. needed to clamp down. So Uber prevails.

We had a useful discussion of this in my high school econ class the other day. I made a point similar to the commenter’s, that Uber’s success consisted of changing taxi regulations to allow unlicensed cars and drivers to operate.

There are many other areas where one can imagine a profitable business model could be generated by getting rid of regulations that restrict would-be suppliers from entering the market. For example, suppose that you set up an Uber that connected prostitutes with customers, and it became accepted and popular, so that the authorities decided against shutting it down. Or an Uber for capable but unlicensed health care providers. Or an Uber for liquor. Or an Uber for medications, including medications not approved by the FDA.

One student looked up the market valuation of Uber and found it to be somewhere north of $50 billion. Where does that value come from? (My first thought, by the way, is investor irrationality.)

If what Uber has is a superior algorithm for dispatching cars, then taxi companies could simply hire software developers to build such an algorithm. I don’t think that is the answer. Of course, I remember that when Amazon said that it was going to branch out from books to selling everything, somebody remarked that it would have difficulty competing with Wal-mart, because it is cheaper to start with Wal-mart’s logistics system and build a web site than it is to start with Amazon’s web site and build a logistics system. It is worth thinking about how Amazon managed to overcome that apparent disadvantage, but that is a separate post.

A student pointed out that the remarkable accomplishment of Uber was convincing riders that it is safe to use. “Can you imagine what my mom would have said a few years ago if I told her that I was using my phone to find a stranger to pick me up in a car? And yet people are ok with that now.”

I think that is the real key to Uberizing an industry. Take a business where the public has come to fear unregulated service providers, and find a way to overcome that fear before the incumbents find a way to use the political system to stifle the business.

Why don’t competitors come in until Uber’s profit margin shrinks? The students think that Uber has powerful brand recognition. One way to think about this is to ask why competitors do not come in to challenge Google.

I think that the analogy between Google and Uber breaks down because consumers do not pay to use Google. To take customers from Google, you have to offer consumers something at the same price (free) that provides a better user experience. That’s tough.

To compete with Uber, what you have to offer consumers a similar user experience at a lower price. That strikes me as not so hard to do.