Apple Wants iCloud to Be the World's DVR

The Wall Street Journal has been revealing some details about Apple's plans in the television space. Steve Jobs famously said he thought he had "cracked" the problem of television shortly before he passed away last year, and everyone has been trying to figure out what he meant ever since.

The latest report from the WSJ, if true and I'm interpreting it correctly, likely reveals what Jobs thought was the breakthrough:

The Cupertino, Calif.-based company proposes giving viewers the ability to start any show at any time through a digital-video recorder that would store TV shows on the Internet. Viewers even could start a show minutes after it has begun.

The vision here is pure Apple. The company identified an area of complexity, in this case managing TV recordings, and plans to offer a simple solution where it simply does it for you. Here, iCloud becomes the world's DVR. There won't be boxes in every individual home making millions of individual recordings of the same programs; there will be one place that "records" the programs (Apple's datacenter) and all of the boxes will stream that copy.

You won't miss a show because you forgot to set up a recording; Apple is recording it for you. You won't miss a show because the DVR filled up; Apple is recording it for you. You won't miss a recording because you're out of free tuners, or because the cable went out, or because a cloud went between you and the satellite. Don't worry. Apple's recording it for you.

Obvious road blocks have to be overcome before this vision of the future can come to pass. For one, the WSJ reports that Apple doesn't have a single deal worked out yet with any content providers or cable providers to make this happen legally. For another, this setup requires a completely reliable Internet connection. If the Internet goes out, you not only have no TV anymore (not a guaranteed problem today) but you can't watch your recordings in the meantime either.

Plus, ISPs aren't going to be happy about a system like this because it would put an enormous strain on their networks. They are already playing around with bandwidth caps, and that's without most people getting their TV through the Internet. Perhaps the new H.265 standard will solve this particular issue, but it's not going to be available for anything until "as soon as 2013" (which probably means later than that, given the choice of weasel words here).

This sounds like a really cool way forward. I have my doubts that we'll see anything like it any time soon because content owners, cable providers, and ISPs are some of the worst companies in the world. Of course, Apple worked things out with cell operators, who are just as bad if not worse, so there is some hope out there.

Paul Ryan Is Mostly Unremarkable

Paul Ryan is the pick as Mitt Romney's vice president. Lots of pixels and ink have been devoted to what that means and how Ryan changes the game (or not, as the case may be).

Ultimately, Ryan isn't that remarkable among Republicans. Look over his record.

He voted for George W. Bush's unfunded tax cuts and his unfunded Medicare Part D expansion. He voted in favor of the unfunded war of choice in Iraq. He voted for TARP and the bailouts, practically begging his colleagues to support the former. When Barack Obama took office, Ryan got religion about deficits and eventually put together his famous series of budgets that cut taxes and spending.

In other words, he is a garden variety politician. Spending by his party's leader is a judicious use of our resources that strikes the right balance, while spending by the other party's leader is wasteful and a burden to future generations. Deficits created by his party aren't worth worrying about, but those racked up by the other party are dangerous. Nothing is new under the sun.

Ryan does shine as a communicator, as he's able to state his cases in a clear and often convincing manner. He will do a better job at advancing his party's ideas than Romney does. However, there's nothing in his record that makes Ryan all that special. He's a Republican who mainly just votes the party line.

Why Government Austerity Isn't a Good Idea Right Now

The practice of government austerity, defined as the raising of taxes and lowering of spending to improve the government's balance sheet, is not what the United States needs right now. Here's why.

The economy can basically be summed up as the total number of goods and services produced in the country. The measure for that is GDP. At present GDP is growing, but at a very slow rate.

Also at present, private American citizens are deleveraging in aggregate, or paying down their debt loads together. They're doing it at a faster rate than the citizens of many other developed economies with high private debt.

In the economy, one person's spending is another's income and vice versa. The banker who buys a latte at Starbucks helps pay for the barista's salary, while the interest paid on the barista's credit cards helps pay for the banker's salary.

The economy grows from year to year as people produce more (and more valuable) goods and services. Some people spend less than they make and save the rest, while some others spend more than they make. It's not all spendthrifts who do the latter; retirees, for instance, spend more than their incomes as they live off of their retirement savings. An entrepreneur bootstrapping a new business would also be expected to spend more than his or her income.

Under normal circumstances, there will be a good mix of people spending less than they make and spending more than they make. We don't have that now. Far more people are looking to spend less than they make than the opposite as they pay down their debts and/or increase savings. The large number of people who are behind or underwater on mortgages are a significant part of those net savers. Their preference will be to pay down that debt no matter how alluring increased consumption becomes. This state of affairs has become known as a balance sheet recession.

Due to the deleveraging, economic activity in the private sector is lower than it otherwise would be. Due to high unemployment, it's really lower than it otherwise would be. Only two things could compensate for it. One is running a trade surplus, but the country hasn't done than since the 1960s.

The other is if the government steps in and spends more than it takes in by running a deficit. It does that already, of course, and has for many years.

Now let's think about government austerity. The government would roll back its economic activity by spending less, and it would further inhibit private sector activity by raising taxes. Some people claim that an austerity program would help the economy by unleashing a flood of economic activity currently held back by people worried about a potential sovereign debt crisis in America. I don't see it.

If regular people were only just saving money, I might believe that. They're not. They're paying down debts, and they will continue to do so until their overall level of debt is sustainable. Most regular people also pay no attention to current events, have no idea what the state of the government's debt is other than "it's big", and do not think about future tax rates when planning purchases.

Cutting back government economic activity right now will just hurt the economy. That will just put more people out of work, thereby slowing economic growth. Growth is already slow right now; cutting back on government spending might cause the economy to shrink as it has in some European countries. Austerity in a bad economy is self-defeating in that way. If the economy shrinks, the government collects fewer taxes and can't reduce its deficits as quickly as it had intended to (or at all, if it's a severe case).

The government can try to jump start the economy by doing more spending, but it must do it smartly. Passing out tax rebate checks probably won't get the job done, as many of them will just go to paying off debt. That might bring the ultimate end of the deleveraging cycle a tiny bit closer, but $400 or $800 is peanuts compared to a mortgage.

It'd be better to use it to directly employ people and invest. Have state and local governments re-hire teachers, police officers, and firemen who have been laid off. The government could fix the nation's infrastructure and put construction workers back to work, something that will benefit everyone. High unemployment takes a toll, and long term unemployment takes an even larger one.

I am still working to understand economics better and figure out what is the best way forward. I'm not sure of a lot of things, but that austerity would be bad for the US is one thing I'm certain of.

Does High Debt-to-GDP Ratio Inhibit Growth?

A Twitter friend of mine sent me a paper by Reinhart, Reinhart, and Rogoff titled "Debt Overhangs: Past and Present". It presents evidence that periods in advanced economies where the public debt/GDP ratio is above 90% for five or more years are marked by lower growth than periods where the public debt/GDP ratio is lower. The implication, if not the conclusion, is that a large debt overhang can cause GDP growth to be lower than it otherwise should be.

The introduction of the paper reveals the question that its trying to answer: if interest rates for a high debt/GDP economy are low, should the government take it as a sign that it should not worry about the debt and use borrowed money to try to stimulate the economy? The authors seem to argue that the lower growth rate during high debt/GDP periods means that no, that isn't the right approach to take.

The debt-to-GDP ratio has two factors: debt and GDP. For public debt to go above the 90% threshold, either debt had to rise greatly versus GDP, GDP had to fall greatly versus the debt load, or both. It's interesting to see how that plays out with the paper's core data.

The data it presents covers the past 200 years for today's advanced economies. Page 13 of the paper is where the table of it begins. If you look at each period of at least 90% debt-to-GDP ratio, you'll see that nearly all coincide with at least one of four factors: war, financial crisis, the Great Depression, and international recessions. There are two exceptions.  One is when Spain lost the last of its colonies. The other is Greece in the 1800s, and that country, as best as I understand it, wasn't really an advanced economy during that time.

War causes debt to rise as governments mobilize, and it can negatively affect GDP quite a bit if its on your own soil. A financial crisis will not only hit GDP but also cause a government to start running deficits (or much larger deficits) as tax revenues fall and social safety net spending rises. The Great Depression lowered GDP for everyone, and international recessions do the same thing on a smaller scale.

The paper doesn't discuss the possibility that both the high debt/GDP ratio and the sustained period of low growth might have been caused by some other element (war, financial crisis, etc.), which would mean that the solution to slow growth might not have anything to do with reducing the public debt load. It devotes only two sentences to this kind of question of causality:

Another line of reasoning for dismissing concerns about public debt and growth is the view the causality mostly runs from growth to debt.  The multi-decade long duration of past public debt overhang episodes suggests that at very least, the association is not due to recessions at business cycle frequencies.

It's probably not due to the regular ups and downs associated with the business cycle. However I don't think that war, severe banking panics, equity market collapses, the popping of enormous asset bubbles, or things of that nature are part of the regular business cycle either.

Two of the authors, Carmen Reinhart and Kenneth Rogoff, wrote a Bloomberg editorial in 2011 well before this paper was published but along the same lines. They've been working on this issue for years. They do at least admit there that, "Anyone familiar with doing empirical research understands that vulnerability to crises and anemic growth seldom depends on a single factor such as public debt."

In both that editorial and especially the paper, they talk about how the overhang of private debt can be a big problem too. That's definitely for sure. If you're a believer in the idea that we're in a balance sheet recession, you're definitely on board with private debt being a problem. Individuals deleveraging will consume and invest less, depressing economic growth rates.

But how would high public debt take a toll on the economy? One way is if the government also deleverages by cutting spending and/or raising tax revenue to pay down the debt. That certainly could be problematic, but it hasn't been so far in the US. The federal government has not done anything substantial to address its deficits and debt loads. State and local governments have had to though, and it has resulted in a large decrease in the public sector workforce. That is keeping unemployment high and is depressing the growth rate for sure.

The other way is if the private sector savings rate rises due to fears of higher taxes to pay down that debt in the future. I really doubt that's a big factor. Only 61.7% of voting age people voted in the 2008 election, and that was the highest turnout since 1968. A 2007 study showed that only 35% of Americans nationwide qualify for a "high" level of knowledge of current affairs. Furthermore, 43% of US households live paycheck-to-paycheck. They can't afford to adjust their spending based on decades-out tax expectations even if they wanted to. The likelihood that a significant number of people consider future taxation in their purchasing decisions is low.

Finally, I used FRED data to run a correlation between the federal debt/GDP ratio and the personal savings rate. The range is since 1966, the maximum I could do. It came out to -0.743, meaning that as the debt/GDP ratio has risen, the savings rate has fallen. Running a regression yields a microscopic p-value, meaning that we can reject the premise that the two things are related. If lots of people consider the national debt load when deciding their savings rate, they certainly aren't acting on it or at least assuming that they need to tighten up in the face of future taxes for debt payments.

What I was really looking for from the paper was some kind of call to action or policy recommendation. It doesn't contain one other than "don't impose austerity, but don't leave the long term debt question unanswered, and do try to get it below 90% of GDP as soon as possible". That's not all that useful, although even getting the first part correct is somehow difficult for world governments right now.

Ultimately I don't think this paper leads to a real policy recommendation because it doesn't look at all about how countries left periods of 90% debt/GDP or higher. Did higher growth occur before or after the end of the period? Did the countries leave the periods more due to growth or focus on paying down the debt? They don't say. And anyway, the most important question is not what caused the nations' debt loads to fall but what ignited growth. Again, they don't say.

The closest they get to answering the exit strategy for a country (other than noting defaults) is mentioning that Belgium's 1920-26 period of high debt was associated with a rebuilding boom after WWI. It's implied that the country grew out of its high debt problem. So does that then mean that countries should embark on similar build-to-grow campaigns (such as massive infrastructure investments, perhaps) to solve the problem? They don't say. The UK was able to grow quite well from 1830-68 with far higher debt than the US has now thanks to being the largest and most powerful country in the world. Might the US's similar status allow it to do the same, or are the situations too different to be comparable? They don't say.

The correlation between high public debt/GDP ratios and slower growth than normal is compelling, but as always, correlation doesn't imply causation. The Great Depression caused 90% debt/GDP or more in some countries, but it didn't in the US and a few other nations. They languished for well over a decade with low growth without high debt/GDP causing it. That as much as anything proves that a nation can have an extended period of low growth without debt/GDP over over 90% as the cause. Without that causal link, the idea that this paper's central thesis offers any universally applicable practical advice disappears.

It's certainly possible that low interest rates on US debt are not a green light to borrow more to try to stimulate the economy, but I didn't really get that out of this paper.

Two Charts That Illustrate Why Unemployment Is So High Still

The answer to why the employment part of the recovery has been so slow is a very simple one. I'll use two charts to show why: private sector employment and public sector employment. The data is seasonally adjusted and comes from FRED, and the public sector figures have temporary census workers removed (because they're just that: temporary) thanks to data published by Veronique de Rugy of George Mason University.

First up, the private sector:

Click the image to make it bigger. The X-axis is months after the official end of the recession.

Compared to the last two recessions, the rate of job growth from the official end of the recession (June 2009) is actually doing OK. The public sector is by no means "fine", as it lost nearly 8.9 million jobs from its peak of employment (January '08) to its trough (February '10) and it's still about 4.5 million jobs below that peak. That deficit in jobs doesn't even account for the number of jobs needed to keep up with population growth either.

However, its growth is similar to that after the 1990-91 recession, and it's doing better than after the 2001 recession. It would be great if it was growing jobs at a higher rate, but its current rate is not out of the ordinary for a post-recession economy.

Now, the public sector:

There's your problem. Overall public employment has done just about nothing but fall since the end of this recession. The terrible recent jobs numbers can mostly be blamed on the decline of the number of government workers. It's less a federal problem than a state and local problem, but that's your explanation for why unemployment isn't lower.

What Mitch Hedberg Teaches Us About Tax Rates

The late Mitch Hedberg was one of the best one-liner comics who has ever lived. In this clip, he explains the concept of marginal utility more concisely than anyone I've ever heard attempt it. The first pancake is great, the second pancake is good, but the fifth pancake brings you almost no benefit whatsoever.

What does this have to do with tax rates? Think of dollars instead of pancakes. For someone who doesn't have much in the way of assets or income, each additional dollar that person acquires is of more value to him or her than someone who has lots of assets and income.

Consider Herman Cain's cartoonish 9-9-9 plan. Under it, everyone would pay 9% income tax. Someone making $20,000 per year would pay $1,800 to the federal government, leaving $18,200 left over for everything else. That could be the difference between having a car or not, or having an important medical procedure done or not.

Now think about someone making $200,000 a year. That person would pay $18,000 per year to the federal government, leaving $182,000 left over for everything else. This person may or may not even miss the income tax given the abundance left over depending on how closely that person manages his or her finances. The tax rate for both people is the same, but the amount paid is more precious to the first person than the second.

That's one reason why we have a progressive tax system where the rich pay more than the poor. It goes beyond non-quantifiable things like "fairness". It's better for the rich to pay more because the amount of marginal value they lose with each additional dollar assessed in taxes is much lower than that of people who have much less.

tl;dr crowd, thanks for coming. You're dismissed.

Google's Android Revenue is Still Difficult to Determine

Google develops the Android operating system and gives it away for free as an open source project. Manufacturers have to meet certain standards in order to get the official Google apps like GMail and the Google Play store (formerly Android Marketplace), but those standards don't involve fees.

Google makes money via taking a cut of paid apps and running an advertising platform that developers can use. According to documents that have come out thanks to Oracle's lawsuit against Google, from 2009-11 Android made $543 million for the company that develops it. The Guardian estimates based on the rough numbers of activations Google has released that it comes out to a little over $10 per device. By comparison, Microsoft makes at least $5 per device on 70% over Androids out there thanks to patent royalties.

So is Android a business failure? It's still difficult to say even when you compare that $543 million over three years to the $38 billion of revenue the company brought in during 2011 alone (and consider that it's probably not the full amount of direct revenue anyway).

Google is not like most companies. It doesn't make most of its money by producing products and services and then selling them for more than they cost to make. It is perfectly content to pour money into products that it doesn't charge for so long as it can collect information about users and their habits and sometimes serve ads on them. It then uses that information to tune its advertising algorithms, the real core of the company. Serving up the most relevant ads possible to its users increases the likelihood of people clicking on them, which then maximizes revenue on the ads.

Android is a both an offensive and defensive play for the company. It's offensive in that Google can get information about users to use in its ad algorithms on top of the app and ad income. It's also a defensive play because Google wants to make sure there's a major mobile OS out there that won't shut out its services.

Google bought Android in 2005, well before the iPhone in a time when Windows Mobile was rapidly growing in the smartphone space. Google probably could envision a future where Windows Mobile dominated smartphones like regular Windows did on PCs, and the default search setting on there would be Microsoft's competing search engine. With mobile the future of computing, such a future would hurt Google's growth prospects drastically.

Windows Mobile obviously tanked and Windows Phone 7 is out there to replace it, but Apple is the big rival on mobile now. Apple does use Google Maps in iOS, but that may not last for too much longer. It also uses Google as the default search engine in Mobile Safari, but there's no guarantee that will last. It was even rumored heavily a couple years ago that Bing would replace Google as the search default.

I really wonder how long a play Android is for Google. I really think the company has already shown us what it wants the future of computing to be with Chrome OS: everything is on the web where Google can track users and serve up ads. If everything does become a web page or app, it doesn't matter which hardware or OS you use because Google could still track and serve ads to everyone. That vision can't come to fruition yet because web technologies can't match the functionality or speed of native code yet, so the company must develop Android in the meantime.

In any event, Android may have indirectly provided the company more revenue than was reported in the court documents thanks to information from tracked Android users helping to hone the ad algorithms. It might also have kept the company from losing revenue. RIM's Blackberry would probably be No. 2 behind iOS absent Android and, for instance, the Blackberry Bold I have for work has Bing as the default search provider.

Google is probably content not to include such considerations when it comes to how much it might have to pay to Oracle in royalties for Java patents, but it does go into the consideration for the value proposition of Android to the company. Because Android provides some sense of security for the company's core business in the fast-changing and uncertain mobile computing market, its value to Google cannot be distilled down to a single number.