Proof of Concept?

It's not a drone but not exactly comforting:

Aviation agencies in Europe and the US are keen to quiz a hacker who targeted flight deck computers.
Security researcher Hugo Teso was able to "hijack" the systems to feed false navigation information to a simulated jet that made it change course.
Mr Teso built his simulator using spare parts from real jets for sale on the eBay auction site.

The Next Big Thing

Long time readers (both of you) will recall a rumination at the beginning of the Great Recession noting that we would likely not see any substantive economic recovery until the emergence of a meaningful innovation (generally a thing with a supporting system, but not necessarily) that would affect the economy in a widespread and long lasting fashion (aka The Next Big Thing.)  Until then we would have to rely on Keynes' "use decay and obsolescence" to replace the stuff we already have and dig our way out of the downturn, not without inestimable damage to actual human beings and to civil society.  And so it has unfolded, ever so slowly and painfully and with great harm.  It would appear however that the next big thing has indeed arrived and we might have two.  

Drones
As with most innovations, the building blocks predate the application by a significant interval.  Real planes that can fly themselves are at least forty years old and working prototypes of military drones date from at least the early 90's.  Not to mention all those radio controlled model planes we've seen in local parks and fairgrounds--the military has been working on radio guided aircraft for nearly a hundred years.  But only in the last fifteen years have we witnessed the deployment of drone aircraft executing military missions.  Understandably general interest has focused on both the novelty and the implications of this technological leap--indeed how can we not be fascinated by the notion of a pilot sitting at a bunker at Creech AFB in Nevada guiding a drone strike in Yemen during a day of flying, then returning to his suburban home for barbecue with the family.  And certainly the Rand Paul posturing in the Senate to make sure the U.S. military does not call down drone strikes on your family barbecue speaks unavoidably to apprehension about where we intend to go with this new capacity.  Indeed we have no way of knowing with certainty what we'll want to do, but some of it will surely be problematic.  If the history of applying innovations provides any sort of guide, drone technology will become cheap, widely available and limited only by human imagination.  Drones can come in any size (the military has already developed insect sized drones, presumably for combat applications,) can carry all sorts of payloads and can have long ranges and long flying times. Most current discussion focuses on the ways government wants to or might use drones, but we can reasonably expect that in twenty years the bulk of drones will be in private hands, doing all sorts of useful private things from crop dusting to dispatching tow trucks and probably doing all sorts of mischievous things as well.  In short there is no way that private and public entities are not going to go crazy with drones and probably in ways we're not very good at imagining at this time.  And in businesspeak, this will prove to be a "disruptive technology" changing the ways we do a great many things; it absolutely will be an economic engine.  

Of course, drones rely on GPS technology, which relies on enormous investment, largely by governments but increasingly within the capacity of private entities to design, launch and control.  Drones also rely on software controlled from a remote location and this means we had better look at the other next big thing.

Hacking
Of course hacking is not a thing like a drone or a cell phone is a thing.  It might best be described as a cultural practice, defined broadly as any effort to access software that is meant to be private and changed only by authorized entities.  Lots of individuals and organizations appear to have lots of motivations for hacking and we now have a great deal of software doing a great many things in the world.  Hackers are at least as smart as the folks who write the software.  We can regard none of that software as being private or invulnerable and any assurances at this time that any software system is adequately protected are fatuous.  How many of your credit cards has your bank had to replace?  How long before hacker teams figure out to hijack drones, or for that matter the Mars Rover?  

So how is hacking going to function as an economic engine?  Three ways:

• Big cybersecurity industry: already functioning, relatively effective, fairly good at coopting hackers (though deciding whose side they are really on easily leads to leCarresque uncertainty about who you can trust,) will attract lots and lots of money, will bump up encryptation possibilities, will have a reasonable degree of success
• New designs that (weirdly) enable ways to fragment software in ways robust enough to enable applications to work across space and time but make hacking unrewarding.  (presumably underway)
• Hacking will become a (semi) legitimate industry, making a living by altering processes or stealing information (already happening)

In short software is an industry dying nearly as fast as newspapers unless it solves (or absorbs) the hacking problem and solving it (whether truly successful or not) will prove also to be a significant economic engine with the likelihood of creating disruptions that are difficult to foresee.  

Everything Solved

When one need not worry about enforcement, practicality, competing interests or the effect on political success, it's delightfully easy to suggest legislative remedies. And thus the One With Everything Financial Reform Act of 2010:

• Banks must be privately held. Several years ago the bank where I keep checking and savings accounts went public. I actually found this confusing from a consumer perspective, as I wondered for many years whether I would have been smarter to invest in the bank's stock rather than be an account holder. As it happened, the stock of this particular bank opened at $10, made it to the mid-thirties and today lives in equity skid row at well under a dollar. (And no, it's not on the FDIC watch list.) I'm happy at this point to have kept my money where it was, but it's gotten me to wondering about whether it's wise to allow investors to even have such a choice. Ordinarily businesses go public because the benefits of doing so outweigh the benefits of borrowing money for investing and expanding. I am unclear what need any bank would have for substantial investment capital to run their business--all they really need is software and storefronts. Original investors/founders of a business certainly like to cash out from going public, but in fact there are many other suitable ways to realize gain from and share ownership of a business. In fact what going public meant for banks meant was access to substantial amounts of capital for which they were far less accountable. It has meant they have balance sheets with numbers far in excess of deposits/loans and it has meant an irrestible temptation to invest speculatively in the chase for ever better margins. The repeal of Glass-Steagall certainly did not help, as conventional and investment banking could once again be joined in single entities. There are plenty of mechanisms for investing in risky undertakings. We are suggesting however that the banking sector should be split (again) into a staid sector and a not-staid sector, kept apart and regulated quite differently one from the other. Neither sector however should be allowed to raise funds through public stock offerings. In the end, customers will keep a better watch on their money than shareholders.
• Increase margin requirements on all investments. One can only assume that the delusion that everything is different this time was so compelling and so widespread as to make all previous instances of leveraged bubbles not relevant to the present. When the potential losses from leveraged instruments exceeded the global GDP in 2007 though, it ought to have given pause (and ultimately gave much more than that.) Borrowing to invest is a valid tool in some situations and immensely appealing, but so fraught with danger as to require about the same level of oversight as the sale of dynamite.
• Reduce the impact of the financial sector. In the last few years the financial sector (FIRE) has, by many estimates, accounted for over 20% of GDP, significantly more than its historic portion of under 5%. (And yes, there is probably justification for treating these numbers with caution.) The reasons this happened and the implications of it seem to be complex, but 20% seems way too much, certainly way too much for a sector whose mission is essentially to funnel surplus capital to places where money is needed for productive investment. It suggests (as we argued in a previous post) that no one can state with certainty what the next transformative wave in this economy will be or even whether there will be one. But whether we have a mature economy quietly optimizing what it has already accomplished or one that is moving rapidly to deploy major changes does not require a sector that does not produce actual wealth. (We're not suggesting that the contribution of the financial sector in collecting capital, managing risk and helping the marketplace work more efficiently is unneeded, only that it reworks wealth created by others.)

Forwards and Backwards

It doesn't require one have a paid up subscription to Conspiracy Journal to wonder about the connections between the increasingly dramatic income inequality in this country, the difficulty we observe our national legislature is having in passing even a modest expansion of health care coverage and the economic difficulties we've been experiencing in the last two years or so. One could readily view our current economic turmoil as the consequence of choosing to lend money to those whose incomes are stagnating or decreasing rather than adopting an explicit policy of redistribution. The underlying postulate, i.e. meaningfully including more people in the consumption economy increases overall wealth, is certainly true enough. The obvious strategy would have been to increase consumer income through earnings or redistribution. But lending money at usurious rate to people whose incomes were not growing seems to have been particularly unwise. It did turn families into able consumers for a short time but the difficulty of repayment has proved insurmountable for millions and in delicious irony, those same citizens will be taxed for a generation to pay for this short sightedness that they had little part in creating. But though in some circumstances reduced, the wealthy have remained wealthy. Their reluctance to share (even if their longer term self-interest might be served better) is understandable as is their (largely successful) purchase of Congress (easily affordable, given the alternatives,) but what remains puzzling is the ready acquiescence of a large portion of the population in this process. We see substantial (at times majority) support for leadership that makes policy at odds with the interests of the wider electorate. It's tempting to blame the tendency of Americans to identify with the wealthy, thinking the social distance between themselves and the wealthy is sufficiently small that only the smallest positive turn of fate will allow them to join the elite. That this is utterly delusional hardly bears iteration. That a large number of people believe it in one form or another is probably true, but is also probably not explanatory.

I'm more inclined to blame the resistance to the effects of our behavior after the Civil War. This nation failed to assist freed slaves with even the most rudimentary economic or political support so they could make new lives for themselves. After 1876 the federal government explicitly abandoned even the minimal effort they had done, leaving the South in the hands of unrepentant insurgents who did everything within their power, officially and unofficially, to make sure African-Americans remained poor, uneducated and in many cases, dead. Southern states to this day refuse to fund education, health and basic social services as part of that process (for those same insurgents have handed power from generation to generation,) and even at the expense of impoverishing its white citizens. The justification in the ensuing 150 years, from both the South and from federal leadership, has been essentially "We don't do redistribution--everyone's on their own." To change now would require that we acknowledge our historic, collective shame for the experience of African-Americans, during slavery and afterwards, to rethink what the American experience has been for everyone, and to take responsibility for the kind of people we have become. I am not optimistic.

Hiatus is Over

Back from a year of actual politics, and yes we did quite well, thanks. Our local legislative candidate actually managed not only to beat (what we thought was) a popular incumbent, but won a higher percentage of the vote than Obama (who did pretty well himself in our neighborhood.)

As much fun as it is to see our folks winning elections, it's a pretty horrible time to be actually responsible for the business of governance. Even this observer was able to see to the economic crisis building, but the task of doing something genuinely useful is daunting, more so because of some structural issues:

• The U.S. economy has enjoyed a generation of prosperity thanks to actual innovation in the private sector. The most evident innovations occurred with the widespread applications of computer technology to business and personal life and with the related spread of communication technologies. But significant innovations (or more accurately, optimizations) also occurred in transport, manufacturing, building materials and government, which had the effect of making products and services genuinely better and the work force more productive. We'll defer a discussion of how the wealth generated by these innovations was not equitably distributed to another day, but one major reason for the economic bubble that is now deflating is that there has been no Next Big Thing (NBT) to attract private investment. Capital fled into housing after the dotcom bust, but in the long term housing is not a productive investment. The next wave of challenges we face (global warming, energy efficiency, health care) will involve addressing what economists call externalities and are ill suited for the private sector to address without public sector guidance. At a minimum, government funded R&D, much of it initially unproductive, will need to be funded at unprecedented levels and combined with a meaningful political will that has yet to emerge.
• In apparent contradiction to the paragraph above, the U.S. economy in the last generation has been beset by a succession of economic crises that have destroyed immense amounts of wealth: start with the S&L crisis in the 80's and the 90s recession, tick off the Mexican crisis, the Asian bubble, the LTCM crisis, the Russian crisis, the dotcom bubble, Enron, Worldcom, and finish with the housing and credit bubble. The FIRE (finance, insurance, and real estate) sector of the economy, the job of which is to allocate capital not in use to places where it is needed, seems to get it wrong every time. Greed, fraud, herd mentality and the corruption of the political sector all seem to be implicated and solutions are hard to come by. It is hard to have much confidence that more stringent regulation will accomplish much, particularly if regulators are as compromised as they appear to have been.
• The U.S. economy has demonstrated signs of significant strain in the past ten years. In particular, the middle of the country has been losing population for twenty years as people (particularly younger and better educated ones) have been migrating to the coasts. The weather isn't very good in the middle of the country, and with the decline of manufacturing, there is little need for large numbers of people to be close to the region's iron and coal deposits or its water transport. Farming, farming support and ag related biotech simply don't require that many people. Folks who don't or can't move will be stranded, both literally and figuratively. Large swathes of the nation will need to learn to do something very difficult, i.e. manage decline. We don't like to even think about this let alone do it, and managing decline presents serious practical challenges. This is much of what is involved with the auto bailout. The global auto industry has suffered from overcapacity for many years; the manufacturers have been playing a game of chicken during that time, each hoping (and in the best companies, planning) to survive but knowing some won't. The American based companies don't make horrible cars, but their best product (trucks) are proving vulnerable to oil shocks and in any event are targeted to a dwindling demographic. They are not going to catch Toyota and Honda in making durable, fuel efficient sedans. It is probably a bad idea to let the American companies fail over the next six weeks but they need to start managing their decline. They will need the help of the public sector to do this. No one is going to enjoy it and since the auto industry is concentrated in the middle of the country, this is where most of the pain will be felt. Since the purported theme of this blog was the effect that slavery and Southern exceptionalism have had on the larger American experience, it was interesting to see Southern Representative and Senators take the lead in denying assistance to the American car makers. No doubt the deals they made with foreign manufacturers to place factories in their states and their intense dislike of unions played a role, but it is hard not to wonder if their sheer loathing of the North (particularly after the recent election) did not factor into their stance.

The News Is Not Improving

A post from earlier this year considered the possibility that debt problems might not be limited to home mortgages. Unsurprisingly problems with credit card debt seem to be emerging--the absolute numbers are not awful but neither are the trend lines encouraging. Banks do indeed securitize credit card debt. While the margins on credit card debt are quite wonderful for bankers (and entities that behave like banks,) they have also learned this year that selling debt does not inoculate them against loss, that in fact securitizing debt can cascade into astonishing disaster.

It's Not As Though

we needed further confirmation of the difficulties with torturing detainees, but this excerpt from Downfall: The End of the Imperial Japanes Empire by Richard B. Frank makes the point nicely.

To set the scene: it is the morning of August 9; the highest level of the Japanese government is pondering its options following the atomic bombing of Hiroshima on the sixth. The level of concern is quite high.

Grand Chamberlain Hisanori Fujita recalled a mood of "impatience, frenzy and bewilderment" when the Supreme Council for the Direction of the War assembled at 10:30. The fevered atmosphere was intensified by the rumor that Tokyo would be the next target for the atomic bomb. The source for this story was Lieutenant Marcus McDilda, a captured P-51 pilot. After a day of repeated beatings and torture, a Japanese officer threatened McDilda with death if he failed to divulge details about the atomic bomb. McDilda, who knew nothing, fabricated a description of an atomic weapon in his heavy southern drawl. When his interrogators demanded to know the next target for an atomic bomb, McDilda reflected a moment and named Kyoto and Tokyo. The capital, he said, would be bombed "in the next few days." (p. 290)