Tablet PC Changing Books

Though many are predicting the iPad will flop, I find it interesting to think about what's possible that was never possible before with new technologies. Professor Kobrin of Wharton talks about the effect the tablet PC could have on books:

The Apple tablet allows books to take on a different meaning. One, it isn't clear that every book has to be 350 or 400 pages, if they're published electronically. Two, if the tablet is going to succeed, it's got to have active content. The number of people who want to read War and Peace on the tablet simply as the printed word is limited. Where the tablet will be valuable is when books begin to contain video and when they contain graphics. Business books could contain, for example, spreadsheets, models and charts that are active.

Paid vs. Free Content, Publishing Pains, Apple Tablets and All That ... - Knowledge@Wharton

The Basic Argument for the Bank Tax

I have been surprised at the number of economists in favor of a bank tax, even if the bank tax that Obama has proposed is not necessarily the bank tax they support. The basic argument for the bank tax is that the American public effectively insures large banks with bailouts because large banks are too critical to the economy to go under. Banks should have to pay for that insurance.

Harvard economist Greg Mankiw has posted a few articles from NYT and Forbes that I found particularly interesting, and so below is the economic version of a mashup of some points that I find compelling, at least in principle:

President Obama has proposed a special tax levied on large financial institutions. In general, I am skeptical of narrow-based taxes, as they feed a particularly nasty kind of politics, where the majority gangs up on a minority. Nonetheless, on the economic merits, there may be a case for the bank tax. (Mankiw):

Firms that are deemed too big or too systemic to fail have a safety net. They can take bigger risks and make bigger bets, secure in the belief that the government (or taxpayers) will guarantee their liabilities if they fail. (Forbes)

Now we must figure out how to undo the damage. In a more perfect world we would do three things: 1. modify the bankruptcy code and create mechanisms to allow for the orderly failure of these institutions; 2. impose a tax on them that is proportional to the risk to the system that they create; and 3. treat that tax as an insurance premium to cover the cost of future problems, just as the FDIC charges banks for deposit insurance. (Forbes)

We suggest taxing banks based on the difference between their assets at the end of August 2008 and their current level of capital. After all, the support these firms received was based on the size of assets before the financial panic began, not the size of those assets today... Because our version of the tax would require each firm to pay a tax proportionate to the size of its bailout, it would fall hardest on the former investment banks whose very survival was in doubt before the government stepped in. These firms are now making eye-popping profits and are on a path to pay record bonuses, but more importantly they had the most borrowed money that wound up being unexpectedly insured. This is why they ought to pay more. (NYT)

Commercial banks might complain that they already pay a fee to the Federal Deposit Insurance Corporation, making the new fee a double tax. That is partly correct, but the deposit insurance they paid for was underpriced. As a compromise, however, we suggest that the current year’s deposit insurance payments be deducted from the new tax payments. (NYT)

At the end of the day what we need are mechanisms to deter excessive risk-taking at the expense of the taxpayer. The proposed tax is a very imperfect step in that direction. (Forbes)

I am sure the devil is in the details, but the principle of a bank tax as insurance seems to make sense.

Bank Tax Articles:
http://www.forbes.com/2010/01/19/bank-tax-politics-economy-opinions-columnists-thomas-f-cooley.html?boxes=businesschannelsections

http://www.nytimes.com/2010/01/20/opinion/20diamond.html
http://gregmankiw.blogspot.com/2010/01/bank-tax.html

How Google Will Pay Millions for News They Used to Get for Free

The story and debate around Rupert Murdoch blocking Google from indexing News Corp. websites (Fox, WSJ, etc) has been fun to read. Techcrunch reported on Jason Calacanis, CEO of the search engine Mahalo, who thought it was a great idea:

[Calacanis's] simple suggestion: Not only should Murdoch de-index from Google, but he should get Bing to pay him for the exclusive right to index it... If other media companies joined Murdoch Google could actually find itself in a very difficult position, where Bing had content that Google didn’t. If you knew that Wall Street Journal and, say, New York TImes content was only in Bing search results, mainstream search users would suddenly have a big reason to go to Bing.

This would shift the balance of power away from search engines and to the content sites – if they could pull it off. Bidding wars over rights to index content would conceivably break out between Google and Microsoft, just as bidding wars have broken out in the past over the right to serve search ads into third party publishing sites.

The interesting thing here is that there's sort of a prisoner's dilemma going on here between the search engines. As soon as Bing offers News Corp money to exclusively index their news, then Google will have to respond with an offer to News Corp to exclusively index their news. The implicit assumption on Calacanis's blog is that Google will just roll over and let Bing buy up the exclusive rights to all news sources - which we know won't happen. If Bing doesn't offer News Corp money though, then Google doesn't have to either.

But once Bing makes that first offer, it doesn't stop there. Next all large news sites threaten to take themselves off Google/Bing unless Google or Bing pays them for exclusive rights. Suddenly, we have a world where news distribution is divided between the two search engines - not necessarily the best situation for users who have to remember which search engines search which new sources.

What seems like a more likely equilibrium to me is that large news sources will start charging search engines to index their sites, but not force exclusivity. News Corp has already proved that's there's value to Google and Bing to index their content, and both have shown willingness to pay for content in the past. I think News Corp could make more money from charging multiple search engines to index its site than it could for just exclusive rights. It would be better for the user at the end of the day too.

One consequence of paying for the right to index, though, is that it creates a larger barrier to entry to new search engine players. It will cost Bing and Google hundreds of millions of dollars a year for the right to index large news sites, which is capital a new search engine would need just to play in the general search engine market. I suppose the search engine market is already duopolistic so what's another little nudge in that direction?

But why now? Why didn't this happen four years ago? First, when we lived in a unipolar world - all Google, no Bing - the news sources didn't have the power to threaten Google. Second, Twitter/Facebook news discovery didn't exist. Dallas Maverick's owner, Mark Cuban highlighted this trend:

What has changed ? Quite a bit, but lets start with this. TWITTER IS SURPASSING GOOGLE as a destination for finding information on breaking and recent news of all types. Whats more, TWITTER POSSES NO THREAT to any destination news site. 140 characters does not a story make. Find it on twitter, link to a story on say, FoxNews and everyone is happy. The same concept applies to Facebook Links. Twitter and Facebook are not news destinations that can compete with traditional news sources. Google is. Rupert loves him some twitter. Google, not so much.

Twitter and Facebook are becoming substantial referrers of traffic, which decreases the news sites' reliance on search engines. That frees up the news sites to negotiate with Google and Bing for access to index their websites.

That's all I got on this subject. It'll be interesting to see how this actually plays out.

Organic Isn't Healthier, But People Will Keep Buying

BBC News reports:

Researchers from the London School of Hygiene and Tropical Medicine looked at all the evidence on nutrition and health benefits from the past 50 years.

Among the 55 of 162 studies that were included in the final analysis, there were a small number of differences in nutrition between organic and conventionally produced food but not large enough to be of any public health relevance, said study leader Dr Alan Dangour.

Overall the report, which is published in the American Journal of Clinical Nutrition, found no differences in most nutrients in organically or conventionally grown crops, including in vitamin C, calcium, and iron.

The same was true for studies looking at meat, dairy and eggs.

I found this report surprising. I know I thought organic was healthier - though I didn't get to the point where I was a devoted Whole Foods shopper.

What's interesting to me is that while this study seems fairly conclusive, it probably won't materially change the buying habits of those who have bought into the ideas and lifestyle of organic foods. Not only do organicphiles have their buying habits formed, but it's also a matter of cognitive dissonance.

Cognitive dissonance, according to Wikipedia, is, "an uncomfortable feeling caused by holding two contradictory ideas simultaneously...The theory of cognitive dissonance proposes that people have a motivational drive to reduce dissonance by changing their attitudes, beliefs, and behaviors, or by justifying or rationalizing their attitudes, beliefs, and behaviors."

In the case of organics, organicphiles for years have been paying higher prices for food that they believed was better for their health. They saw themselves as smarter for these purchases. When someone comes along though, and says, "We've looked at 162 studies and found that organic food is not materially more healthy," it shakes the bedrock of their belief. How can they be smart and tricked into buying more expensive food at the same time?

To solve this contradiction, one of two things can happen: the person can either admit that they were wrong (which feels like it invalidates their "smartness") or they can change the reason they were buying organic. Suddenly environmental or animal rights factors become more important. Or maybe they believe the studies were poorly conducted. Either of those assertions is easier than retraining a person's beliefs about themselves or habits in shopping.

So while this study is interesting to me, I am not shorting Whole Foods' stock anytime soon. The idea that organic is healthy is too ingrained in the mind of shoppers, and so I expect to see the trend toward organic continue to grow despite this report. Human behavior is fascinating.

Disclaimer: I know there are a number of people who do primarily eat organic for environmental and animal rights reasons. I also know that just because the additives farmers used in the past turned out to be healthy doesn't mean that additives in the future are going to be healthy. What I am more interested in is the human reaction to facts, and why they choose the behaviors they do, even in the face of contradictory evidence. So organicphiles, don't let me or this article stop you from enjoying!

The Cover Letter Is Dead

I've been helping people a bit with their job search lately, especially since I just completed my own. I think one area where people waste a lot of time is in writing cover letters for job postings.

Job post websites are really a trick. Monster.com will rain job postings on you. You'll find five or six job postings you find interesting and pour yourself into your cover letter - an hour for each. You submit online and wait. And wait. And wait.

In my own job search, I found a direct relationship between writing a cover letter and never hearing back from a company again. I wrote exactly five cover letters during my search, and from those five, I was given exactly zero interviews. I mean, if I'm writing a cover letter, then it's because I haven't made enough human connections at the company to pass along my resume.

The cover letter, in my opinion, is an anachronism. At one point, people needed to write cover letters to companies by snail mail because otherwise, the company receiving a resume alone would have no idea for which position an applicant was applying. Now, with online postings, companies can match a resume to a position without ever reading your cover letter. Companies are asking for your cover letter, not because they're reading it, but because it's just what they've always done.

Think about a company posting a job on Monster. They're going to get over 100 responses (1000 responses?), and how do they sort through 100 responses? They can either scan through 100 resumes or read 100 pages worth of cover letters. They pick the resumes every time.

And to be honest, if my resume is stacked up against 100 other applicants, I'm going to lose just about every time too. Assuming my resume gets read and doesn't just sit on someone's desk, I'm going to be up against people who are overqualified for the job. Sure the company posted for one year of experience, but when resumes start pouring in with 2-4 year's experience, they are never going to call me back with my one measly year.

So I have to stand out. I've found that if I can talk to an employee at the company, I can always get my resume passed along and at least read by the right person. Getting read puts me miles ahead of everyone who just applied on Monster. When I see a job posting, I don't apply immediately on the site; instead, I look on the company website for the email of the recruiter. Then I email the recruiter directly with an innocuous request to talk to someone at the company:

Dear Consulting Firm,

I saw your job listing for an analyst position on Monster, and I was hoping I might be able to talk to someone at the company to find out more before I apply. Would you be able to set that up?

Just to give you a little background on me: I worked for the management consulting firm, XYZ Consulting Firm, for the past year after graduating from Great Uni undergrad. My biggest project at XYZ consulting was a private equity due diligence case, where I helped create a profitability model for one of their $5B business units. XYZ Consulting Firm recently went bankrupt, and I would like to stay in management consulting, which is why your firm is of particular interest. Attached is my resume for your reference.

Thanks so much, and I look forward to hearing from you!

I have sent that email to two consulting firms and both set up for me to talk to a person at the company. Here's the thing though: they may not reply to your email every time. They may see your resume and not be interested. But at least with this method, they read your pitch and considered it. Submitting through Monster, you won't be so lucky.

The cover letter isn't dead - it's just adapted. The email is a short and sweet version of the cover letter. It tells about an accomplishment that might be interesting to the company [NOTE: one accomplishment that stands out - not all accomplishments], and it requires an immediate response from the recruiter. It's a cover letter for email rather than snail mail.

Of course, if everyone sent in their resume this way, it would no longer stand out, and you'd have to find another way to get a human to respond to you. The recruitment process is a human process. Talk to a human. Get a human to refer you to another human. Impress that human. If they still want a formal cover letter after that, write it, but it's just a formality. Sending in a cover letter to a computer system is the equivalent of sending it into a digital abyss. So stop wasting your time.

If Only the Ayatollah Learned Fairness in Kindergarten

Watching the Iranian election, Karsh reminded me about a study I had read about in Wisdom of the Crowds that emphasized the importance of the perception of fairness in human society.

The study went something like this: you and I would sit across from each other, and the researcher would give me $10. I could then divide up the $10 between you and me however I wanted. I could take all $10 for myself and give you $0 in fact. The catch, though, was that if you rejected the amount I gave you, we both got nothing. Most people split the $10 down the middle, $5:$5, or slightly skewed to the person making the offer, $6:$4.

Now let's go back to the two of us sitting across from each other. I get the $10, and I decide to give you $1, and I take $9. What would you do? Do you accept? If you accept, it would make rational economic sense, since you would have one more dollar than if you reject (remember, we both get $0 if you reject).

What the researchers found was that in most cases, people would reject an offer of $3 or less. People cared more about fairness in the interaction than they did about the economically rational move.

The author of Wisdom of the Crowds, James Suroweicki, goes on to explain that they did studies on income disparities between the rich and poor in various industrialized countries, and the United States came out with one of the higher disparities. Poor Americans, though, were among the most satisfied with the income distribution. Why? Suroweicki points to the perception of the American Dream. The poor Americans believed that with hard work and dedication they could be rich too - it was a system that was perceived to be fair (though that's easily disputed).

The perception of fairness is just so powerful. One of the most remarkable moments in American history was the first change in power between political parties. Historically, despots would be overthrown and political factions would war with one another instead of giving away power. In the United States, not a single ounce of blood was shed or riots started over the change in power. It was peaceful; the election of leadership was a system that enough people bought into and believed was fair.

The protests in Iran did not start because Iranians hate Ahmadinejad (though many of the protestors do) - they started because Iranians didn't believe the elections were run fairly. They bought into a system of government where their votes would be counted, and they perceived that the Ayatollah changed the rules. The protests are now about more than just the fairness of the election system, and discontent has certainly been brewing in Iran for a while, but the fairness of the election is what set this whole thing off.

I find it fascinating to look for the perception of fairness and the systems that people buy into to create that perception. The systems are everywhere - from lottery drawings to admissions processes - and don't underestimate the stir people can create if a system isn't fair. Sometimes it can overthrow governments.

Why Is Health Care Spend Worse Than iPod Spend?

What makes health care spending particularly "bad?" I mean, we're trying to limit our health care spend as a country, but why would health care spend be any less of a productive use of money than say buying an iPod?

Harvard economist Greg Mankiw today juxtaposed a statement by Barack Obama forewarning that health care costs could rise to 30% within 30 years with a study that showed that optimal health care spending was over 30% of a peron's income:

Economists Robert Hall and Chad Jones, writing in the QJE a couple years ago:

Over the past half century, Americans spent a rising share of total economic resources on health and enjoyed substantially longer lives as a result. Debate on health policy often focuses on limiting the growth of health spending. We investigate an issue central to this debate: Is the growth of health spending a rational response to changing economic conditions—notably the growth of income per person? We develop a model based on standard economic assumptions and argue that this is indeed the case. Standard preferences—of the kind used widely in economics to study consumption, asset pricing, and labor supply—imply that health spending is a superior good with an income elasticity well above one... In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century.

Amazing what economic models can show you. What makes health care spend a "bad" cost to me though is that it's too often an unmanageable financial burden, namely for:

1. Government. The major driver of our budget deficit is an exponential rise in health care spend. The government will go bankrupt unless it lowers costs and/or cut back coverage.
2. Individuals. According to the Center of Economic Advisers, about 17% of individual bankruptcies result from catastrophic health care expenses. The "rational consumer" who "smooths consumption" doesn't plan for those outlier events of severe injuries and illness. Extending life may be worth the financial burden, but it too often bankrupts a person.

The Center of Economic Advisers report other positive externalities from health care reform, such as higher GDP , lower unemployment, and more discretionary spending for families.

Health care spend, in itself, is not inherently "good" or "bad." I think the key is to find a way to make health care costs manageable for both government and individuals.

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