Why Facebook Should Build a Smartphone

Rumors have been circulating this week that Facebook is renewing its efforts to develop a smartphone to compete with Android and the iPhone. The company has evidently hired several iPhone and iPad engineers away from Apple over the past months, suggesting that Mark Zuckerberg and co. are hoping to capitalize on their Cupertino neighbor’s successes in what has proven to be a challenging market.

Besides having 900 million users, Facebook has become ubiquitous on mobile devices in recent years. Even though Zuckerberg held out on developing an iPad app for quite a while — for reasons that were never entirely clear — the company has established such a strong presence on mobile that many people predict its profits will come to hinge on mobile advertising. And whatever Facebook’s broad-view financial concerns might be, the Facebook service itself has become so essential that having an iPhone or an Android or a Blackberry (or an iPad) without a Facebook app on it has come to feel like an incomplete experience.

Analysts currently disagree over whether entering the smartphone market is worth the risk for Facebook. As Matt Yglesias points out, only two companies (Apple and Samsung) are making any money in this business right now, and it’s unclear whether Facebook would try to compete on the price or value front — i.e. by offering a phone that is either substantially less expensive or substantially more robust than market leaders. Conventional wisdom is that it couldn’t realistically hope to do both.

But given this skepticism, it’s worth thinking about the value proposition to consumers of a Facebook phone. Just as Apple may or may not be currently developing a new TV that would push cable boxes, channels, and confusing remotes into obsolescence, a Facebook phone could move us past the age of phone numbers, email addresses, handles, and user IDs. The iPhone and Android platforms have done a great job of allowing us to organize all the contact information we have to store for each person we know, but they haven’t done anything to tackle the basic problem of having all that contact information to begin with. On a Facebook phone, contacting a person would become as simple as finding their name, and the address book as we know it would likely become obsolete.

Facebook’s real advantage in the smartphone market, beyond any pricing innovations it might develop, may thus lie in its ability to re-imagine mobile communication for the digital age. If you open up the phone app on your iPhone or Android, what you have is little more than a collection of old-fashioned analog technologies displayed in a convenient digital format — an address book, a call log, an answering machine, and a keypad. Indeed, these “technologies” have been around for decades, and displaying them nicely on an elegant device is useful but there’s nothing distinctly digital about it. We are still implicitly hung up, it seems, on the concept of picking up a phone, dialing a number, and leaving a voice message, or alternatively, sending a text message or an email to the appropriate address. New technology has expedited these processes to a wonderful extent, but nothing has changed in the underlying concept of how we get in contact with each other, and it may be time to start asking what’s next.

If Facebook can bring its coveted user experience to mobile along with robust video and audio features, we may see something radically new in mobile communication: the phone-text-email paradigm replaced with the direct communication paradigm. If they get it right, perhaps Zuckerberg would decide to not even call this new device a phone. Digitalizing old technology eventually reaches a plateau, and then it comes time to develop truly digital alternatives (just look at what Apple has done with music over the past decade).

Secondarily, a Facebook foray into the mobile market may represent an opportunity to usher in an “everything is social” age of communication. Right now, there are plenty of non-social functions you can perform on a smartphone, but as more and more apps develop social features, it makes sense to start thinking about a fully social operating system. Certainly, this would align with Facebook’s oft-maligned mission of making things social by default and then backtracking after users start to complain. A fully social OS would resolve this problem by conditioning users to expect every function to be shared with the community, just as is the case with Facebook through the browser and mobile apps currently.

A lot of Facebook’s potential in this market, it must be said, hinges on its enormous user base. What makes Facebook perhaps uniquely positioned to make major strides in mobile communication is the fact that everyone (or almost everyone) is on Facebook. The notion of having everyone on Facebook — and everyone communicating on Facebook all the time — is undoubtedly Mark Zuckerberg’s long-term vision, and even if the world is not quite ready for that (because your grandma still carries her Nokia from 2002), a mobile Facebook OS would be a strong first step in that direction.

And conveniently, it would make the question of how Facebook plans to approach mobile advertising infinitely more interesting.

Important Innovation is Difficult to Do

Most new innovation tends to be driven by market demand. The iPhone gets a refresh every year because people are eager to own the new iPhone. Pharma companies develop birth control and erectile dysfunction drugs all the time because lots of people need them. Oil and gas companies are constantly pursuing new acquisition methods because the world has ever-growing energy needs.

It’s difficult to innovate in ways that don’t address specific areas of market demand because it typically isn’t profitable to do so. It’s more profitable to R&D a new cholesterol medication for sale in the U.S. than to develop a drug that might only be needed in a couple of villages in Africa. And it’s more profitable to update the iPhone’s casing and software than to improve the working conditions for people who maintain the physical infrastructure upon which iPhone usage depends.

In a column for Pro Publica yesterday, Ryan Knutson and Liz Day write about just this issue — tower climbers who are hired out by mobile carrier companies to build and maintain the physical networks that support the data requirements of the iPhone and other smartphones. It would be easy and perhaps appropriate to blame AT&T, Verizon for the jarring number of deaths and crippling injuries among these workers, but I think consumers are also to blame.

Besides profiting greatly, Apple has garnered a great deal of prestige from the iPhone, and perhaps rightly so. But it strikes me as strange that we live in an age where people are somewhat routinely falling to their gory deaths from cell towers so that our smartphones can continue to serve as more than nice-looking paperweights. Most iPhone owners probably don’t understand the critical role of tower climbers in the everyday usage of their device, and perhaps if they did know they still wouldn’t care, but I think it’s worth pondering the enormous gap that appears to exist between consumer-side innovation and backend innovation in the smartphone industry, and perhaps in other industries as well.

Why don’t AT&T and Verizon invest more time and energy in improving safety standards for tower climbers? Why doesn’t Apple subsidize this effort? Simply, I think, there’s just no money in it. But at this point, I’d argue that it’s incumbent upon Apple, given the enormous profit and prestige they’ve earned with the iPhone and some of their other devices, to get involved in this kind of effort just because it’s the right thing to do. The same is true with energy consumption; I would guess there is a far greater demand for a new iPhone casing than for a more energy-efficient iPhone, but Apple ought to invest in making the new iPhone more energy-efficient nevertheless.

Broadly speaking, the challenge to undertaking really important kinds of innovation — as opposed to mere bells-and-whistles innovation — has to do with the resultant nominal value to consumers. Auto owners intuitively understand why it behooves them to own an energy-efficient car; they save money in gas. But most people don’t understand why it behooves them to own an energy-efficient phone, or to eat sustainably-raised meat, or to recycle. And the secondary challenge is that even if the nominal value of such activities could be better explained to consumers, it would be still be small — maybe insignificant.

But to my mind, that’s precisely why wealthy, market-leading companies owe it to the rest of us to innovate in areas that aren’t glamorous or profitable. Improving safety standards for tower workers wouldn’t change a single thing about the way people experience their iPhones, but in the grand scheme of things, that type of improvement is far more appropriate and necessary than whatever new features Apple plans to include in the new iPhone software.

The One-Dimensional View of Rich People

In reading about President Obama’s recent attacks on Bain Capital, I find myself returning to the NYT piece from a few weeks ago about how many super-rich supporters who donated to Obama’s 2008 campaign have since reduced or cut off their financial backing of the president. There seems to be a feeling out there that Obama has — quite perilously — fallen out of favor with Wall Street over the past four years, and while I think that’s factually false, it’s probably worth trying to understand what assumptions that fear is rooted in.

The simplest explanation is that it’s about taxes: President Obama wants the rich to pay more in taxes, the rich don’t want to pay more in taxes, and so the rich have decided not to support President Obama’s reelection campaign. That’s an elegantly simple argument, but I think it posits way too much rational self-interest on the part of rich people — or people in general. In an ideal world, it’s probably the case that no one wants to pay more in taxes and everyone wants to pay less in taxes. In that respect, the rich are theoretically no different from the poor vis-a-vis their tax preferences. Yet, in the real world, everyone knows that tax revenues need to come from somewhere to keep the country running, so political disputes over tax rates boil down to who should be paying how much and why.

Certainly, there are rich folks out there who, despite knowing better, stick to a dogmatic line of wanting to abolish or drastically reduce taxes on the rich. There are also middle class folks who stick to a dogmatic line of wanting to abolish or drastically reduce taxes on the middle class. And there are, undoubtedly, poor folks who want to do away with taxes on the poor. These are all more or less equal expressions of rational self-interest, and I don’t see any reason to suppose that being rich makes people more likely to be pathologically self-interested with respect to taxes or anything else.

We also know from recent political history that self-interest doesn’t work this predictably in real life. If poor and middle class voters had responded to the 2001 Bush tax cuts in a purely self-interested fashion, it’s almost certain that President Bush would have been voted out of office in 2004. But that didn’t happen. By the same token, there are plenty of rich people — Warren Buffett, George Soros, George Clooney — who stand to owe more money to the government under President Obama’s tax proposal but nevertheless support the president’s bid for reelection. Are we to take this as a baffling theoretical anomaly or just a reminder that rational self-interest fails to accurately predict real-life political outcomes in a lot of instances?

As to why some or most or all of rich financial backers have deserted the president, I think there may be a variety of issues at work. There are rational rich folks who just don’t want to pay more in taxes. There are quasi-rational rich folks who don’t want their industry to be more closely regulated by the government under the likes of Dodd-Frank. There are rich people who disagree with Obama’s spending priorities and/or social agenda and therefore don’t want to fund his reelection. And then there are plenty of rich people who continue to support the president, whether or not they attend fundraising dinners and make generous donations.

It could certainly be true (and some evidence may exist) that the financial community’s fear of regulation — whether rational or not — has led to an organized effort within the financial community to reduce donations to Obama. But I haven’t seen any evidence to suggest that rational self-interest is more pronounced among the rich than among the middle class or poor, or that the range of political viewpoints is much narrower among the rich than among other classes. Rather, I think the rich just have a much greater ability to lobby for their own policy preferences than their lesser-endowed countrymen do, whether on taxes or abortion or military spending or whatever.

Taxes, Licensing, and the Barriers to Small Business

Matt Yglesias makes some excellent points in his post about the impact of state-administered licensing requirements on small business growth. The general thrust of the piece is that contrary to conservative assertions that taxes pose the greatest barrier to small business growth, licensing is actually the greatest problem. The piece begins by dispelling the notion that new small business owners should worry more about taxes than anything else, despite what conservatives have typically suggested. Yglesias says:

To be charged a high tax rate on your small-business profits, you need to be turning a tidy profit in the first place. Anyone in that position would surely prefer lower taxes but is fundamentally ahead of the game. The main barrier to entrepreneurship is not that you’ll pay taxes if you succeed—it’s that you might not make any money at all.

He then goes on to describe a number of strange and unnecessary licensing requirements across the country, and concludes:

…a wide range of these rules could be done away with entirely at basically no risk. Regulation is needed when it would make sense for a firm to deliberately engage in malfeasance. Dumping harmful toxins into the air is highly profitable unless it’s prohibited. Financiers can draw huge bonuses by taking on too much risk, only to wreck the economy later. In other occupations, though, shoddy work brings its own punishments. An interior decorator who can’t get recommendations from satisfied customers probably won’t remain an interior decorator for long.

In these cases, licensing rules raise the prices the rest of us pay, make it difficult for successful entrepreneurs to expand their businesses, and are often a major barrier to employment for the most vulnerable populations. New Jersey’s ban on high-school dropouts fixing locks sounds silly, but given the generally bleak prospects facing workers with little education, barring them from whole occupations is a big deal. States should take a good, hard look at their existing codes and ask whether mass unemployment isn’t generally a bigger threat to the public than rogue barbers.

From a common-sense perspective I agree with just about all of this. Whatever the merits, licensing creates barriers to entry — just look at the legal profession. But folks who are already established in their industry have good reason to support licensing; it’s a way to keep potential competitors out through regulatory means rather than to have to out-compete them in the open market. And this kind of regulation-driven “soft competition” tends to be a burden on consumers, who invariably end up faced with less choice and higher prices. In many of the industries that Yglesias touches on — locksmithing, hairdressing, interior decorating, etc. — it seems to make sense to remove licensing requirements and basically go back to a blank slate so long as there is no demonstrable public health risk (as there seems not to be).

This looks to be a perfectly logical argument for restricting the scope of the licensing regime, if for no other reason than that a lot of these barriers aren’t needed, don’t promote competition, and don’t help upstart entrepreneurs or consumers. But I don’t see that any of this necessarily provides a prescription for bringing down unemployment. That’s because people who want to get into locksmithing or barbering or interior decorating — not just as a hobby but as their primary livelihood — have to deal with another barrier that is quite possibly more daunting than licensing requirements: they have to deal with finite demand.

As I think about my own neighborhood — Park Slope, Brooklyn (population roughly 65,000) — my guess is that there are not more than ten or eleven barber shops/salons/hairdressing boutiques within the neighborhood limits. In my home town in upstate New York of roughly 5,000 people, there were two barber shops, and while the ownership changed periodically that number stayed the same from the time I was five years old to the time I left home at eighteen. If you are in a business like cutting people’s hair, or fixing their locks, or decorating their homes, there are only so many customers you can have, and this is limited as much by geography and population density as by licensing and taxes. Yet, depending on your business model, you need a certain number of customers to remain in business, let alone out-compete the other shops in town selling the same service.

Certainly, removing licensing requirements and other unnecessary burdens might embolden folks to try to out-compete existing businesses, which would give entrepreneurs more of a sense of controlling their own fate rather than being nipped in the bud by arbitrary rules. But that doesn’t change the fact that there are limits on how many haircutting businesses can survive in a town of 5,000 people, or 100,000 people, or 10 million people, and those limits derive from factors that really can’t be addressed through legislation.

So, removing licensing requirements might be good for the general mood among entrepreneurs, it might be profitable for a number of cagey entrepreneurs across the country, it might be good for consumers, and it might even be marginally good for states with high levels of unemployment. But the greater the scale on which you try to reduce unemployment, the less the licensing regime appears to be a significant factor in that fight. Eventually you are butting up against the blunt reality that haircutting and locksmithing and interior decorating are low to zero-growth industries heavily constrained by population and geography. People aren’t going to suddenly need their locks picked more often if you remove the licensing barriers to becoming a locksmith, nor are a lot of prospective customers going to move into your town once they find out that you have opened up a barber shop. As an entrepreneur, you can out-compete and survive, which is great for you, but from a policy perspective that does absolutely nothing to address unemployment.

I don’t know what the licensing requirements for barbering are in New York State, but I doubt that removing them would allow my hometown of 5,000 people to suddenly support five or ten new barber shops. And even if it did, would the addition of 30-40 jobs really be that big a deal?

What Can be Done about Bad Betting?

So far a lot of the commentary about yesterday’s mishap at JP Morgan has been along the lines of, “this wasn’t that bad, but what if it had been much worse?”

Here’s Kevin Drum:

…it’s hard not to think that until the casino culture of Wall Street is well and truly reined in, we’re just in for endless trouble. When times are good — or, in any case, not too terrible — losing a couple billion dollars is just an annoyance for JPMorgan’s stockholders. When times are bad, though, all bets are off. Literally.

And Matt Yglesias:

As it happens in this case JP Morgan has a big enough capital buffer to eat the loss and they only lost $2 billion rather than $20 billion. But nothing was stopping them from screwing up even worse.

And Felix Salmon:

Of course, this loss only goes to show how weak the Volcker Rule is: Dimon is adamant, and probably correct, in saying that Iksil’s bets were Volcker-compliant, despite the fact that they clearly violate the spirit of the rule. Now that we’ve entered election season, Congress isn’t going to step in to tighten things up — but maybe the SEC will pay more attention to Occupy’s letter, now. JP Morgan more or less invented risk management. If they can’t do it, no bank can. And no sensible regulator can ever trust the banks to self-regulate.

I’m naturally inclined to jump on the doom bandwagon here and think that if we want to get ourselves into a safer position vis-a-vis speculative betting at the big banks, we need to address these types of hedging loopholes in proprietary trading and strengthen the Volcker Rule as quickly as possible. But, to play devil’s advocate, I wonder whether it makes sense to get too worked up about a $2 billion loss at a bank that has posted more than $17 billion in post-tax income over the past year and that was stewarded quite capably through the financial crisis. If nobody lost out besides Bruno Iksil, perhaps a few other members of the trading unit, JP Morgan’s quarterly earnings, and some of their investors, couldn’t this just be written off as the cost of doing business?

It occurs to me that there may be some deeper structural problems in the works. Hopefully Jaime Dimon and the trading division will install some firmer rules, hand out some lashings, and whip everyone back into a more a level-headed, risk-balancing mindset. But that can only last so long, and as soon as the money from good trades starts pouring in again — as it inevitably will — the general level of risk aversion at the firm is going to slope downward once more. As a point of fact, banks are in the business of taking and balancing risks, sometimes in the interest of market making, sometimes in the interest of helping their investors, and sometimes, it seems, just in the interest of making money. As valiant as it might be of the Volcker Rule to try to curb proprietary trading on the grounds that it is a socially valueless activity, there is a sense in which that seems to be the entirely wrong criterion for developing regulatory legislation. Kevin Drum, for instance, asks:

On net, maybe we’d be better off with no one executing hedges instead of everyone executing hedges, since in practice there seems to be no middle ground. Once you concede that nonfinancial companies can hedge, it’s a short hop, skip, and jump before it’s impossible to distinguish between hedges and bets. No one seems to have a good idea of how to make the distinction in a reliable, consistent way.

Point taken, but distinguishing between hedging and betting does not seem like the most promising approach. Betting is betting, and hedging, in its simplest form, is just balancing out your bets. The Volcker Rule proposes to outlaw proprietary trading, unless it’s being used for hedging purposes, which is clearly a loophole because hedging is just the act of placing additional bets that you think will offset the risk of other bets. And, there is a lot of human judgment that goes into the decision-making over how portfolios should be hedged (i.e. which additional bets should be taken), which means that especially in good times, there is a lot of hubris involved in betting/hedging decision-making. As Yglesias points out, “if you just lost $2 billion that’s a good sign that you’re not hedging.” You’re not hedging properly, anyways.

We could theoretically outlaw betting and hedging altogether, but there are plenty of investors, clients, and entire industries (agriculture, airlines, energy companies, etc.) who have good reasons to oppose that, not to mention the banks themselves (which are doing quite well now despite this mishap). Or we could continue along the present course of trying to draw a tenuous distinction between betting and hedging — all the while disregarding the impact of human judgment — and hope that that fixes the problem. It should be pretty clear now, if it wasn’t before, that hedging isn’t a wholly separate activity from betting.

My feeling is that we just need much stronger regulation and oversight. We should enforce a cap on bank assets at a certain percentage of GDP, banking across state lines should be better monitored, thicker capital buffers should be required, higher transaction fees, and oversight of new financial instruments (if for no other reason than to give everyone a chance to learn how they work). Let’s drop the “socially valuable” test for adjudicating banking practices we just don’t like, accept that banks are in the business of making money, and then force them to make their money in a truly regulated environment. Otherwise, I think there genuinely is reason to be concerned about the next time a big, bad trade blows up.

Elevators, Cars, and Economic Efficiency

Progressive housing policy generally understands conditions that restrict urban population growth to be bad for the economy. Forcing folks to live further and further away from urban centers is costly in time — people have to spend more of their day commuting to work, shopping for groceries, taking kids to school, and so on — and time is one of the most valuable real resources we have available to us. As Matt Yglesias writes, “We have a finite supply of time per day, and no real prospect for increasing the amount of time that exists in a given day.”

One of the prescriptions typically given by housing progressives, therefore, is to change policy to allow more people to live closer together in and around urban centers, the premise being that greater population density enables more varied and specialized economic exchange, which is a boon to the overall economy. As Yglesias points out, the elevator is an efficient technology that could be used to a greater extent to increase population density and economic output in cities without substantially reducing quality of life. It’s better to have a two-minute elevator ride from the top of your high-rise apartment building, that is, than to have to drive forty-five minutes to get to the city.

This kind of thinking makes sense if we assume that the service economy is here to stay — that barbershops, nail salons, restaurants, shoe stores, and the like are going to carry us into the next phase of our economy — and that consequently we need to do everything in our power to set the conditions for a more robust exchange of services. Service businesses do indeed require high population density, primarily because they need lots of customers, and it’s true that they are more likely to prosper in a downtown urban area than in some distant suburb. But I don’t think those actually are the businesses of the future, nor do I think there is much growth potential in the service sector in general. No matter how many more people you pack into cities, and no matter how efficiently you do it, there simply isn’t going to be a substantial increase in the rate at which people cut their hair, get their nails done, buy groceries, or buy new shoes.

Thus I don’t see how it makes sense to suggest that elevators and tall apartment complexes are the key technologies of the future economy, and that policy needs to change to accommodate more of these things in our cities. Engaging in a massive political fight over housing and zoning laws — and crowding more and more people into cities — in order to rescue an economic paradigm that doesn’t stand much chance of significantly growing, just doesn’t seem worthwhile to me.

If you look at the trend of the past few decades, one assumption that seems genuinely bankable is that technological advances will continue to save us more and more time — almost no matter what we do. Compared to just a few years ago, more and more people are working from home, making from home, buying and selling from home, and interacting from home, and the methods for these types of economically critical exchanges will surely continue to improve in the coming years. It thus seems far more sensible to me to continue the trend of people spreading out, making better use of the land resources we have available to us, and utilizing the seemingly infinite potential of technology to push our economy into a new phase.

What will this new economy look like? Admittedly, we will still have plenty of remnants of the bygone days of the manufacturing economy and the service economy. Factories won’t suddenly disappear, nor will typical service businesses. But more and more people, I suspect, will begin to engage in high-tech, low-carbon-footprint commerce. This means more people creating, marketing, and exchanging digital goods and services, more content delivery and storage devices, new authoring platforms, and so on. And the more that people can do this without getting in a car — or an elevator — the better.

To some extent, I think this trend towards a digital economy has already begun, which is why I think it makes a lot of sense to focus our energies on how to grow it quickly and sustainably, and why it makes little sense to try to save the elevator and and the automobile for the sake of the quite possibly tapped-out service economy.

Campaigning and Governing Aren’t That Different

One of the strange yet reliably popular theories about politics is that politicians should worry first and foremost about winning the election and then, once in office, about pursuing their agenda. The first assumption here is that any type of active, morally-involved governance requires actually being in office, and as worthwhile as your agenda might be, you can’t do much with it if you don’t have the power of office. The second assumption is that because of the increasingly polarized electoral landscape, a candidate seeking office will invariably need to fake, distort, or conceal their true views at some point during the campaign in order to capture a broad enough swath of voters to win the election. Defenders of this theory generally hold these premises to be no more applicable than in the case of presidential elections, where the magnitude of the electorate, the number of issues pressing on voters’ minds, and the sheer duration of the contest can be overwhelming. If you take your agenda seriously, the argument goes, it’s worth doing what you need to do to win.

The theory’s logic is fairly clear, but I think it fails to fully consider the harmful effects of distancing yourself too much from your real views. One line of thought is that a grown man running for political office has more or less made up his mind about what he believes, and no matter what he says on the campaign trail to win over undecided voters, he knows deep down what it is he truly believes. That may or may not be true for all politicians at all times (I have my doubts). Another line of thought, though, is that it doesn’t really matter what an elected official or campaigner really believes — it matters what he says and does. Hearing yourself say x over and over again, when you know deep down that you really believe y, is eventually going to have some kind of distancing effect, whether on you, or the people who share your true belief in y, or the people who share your fake belief in x, or the people who are undecided. It is impossible to hold it all in perfect balance; the best possible outcome, in fact, is to hold it in a good enough balance to win a majority vote in an election or get on the right side of a closely polling issue. It disturbs me the extent to which this strategy has become commonplace and even estimable in modern-day politics.

I tend to believe President Obama has privately been a supporter of gay marriage for quite some time prior to his announcement this afternoon. Yet the decision to announce his support, in this particular fashion, at this particular time, in these particular words, was a product of a rather advanced political calculus deployed amidst the increasingly heated run-up to this fall’s election, and it is doubtful that it was even a decision he made by himself. Don’t get me wrong: I am not one to look a gift horse in the mouth, and it’s better he said it in the manner he did than not say it at all. But what bothers me is that Obama is a sitting, governing president — not a challenger trying to round up the troops on the campaign trail — and yet his decision-making in this and other matters often seems to hinge on that same old, campaign-style “win first, govern later” sensibility.

Partly, I think, we have to blame the institution of the presidency. Is four years enough time to cleanly separate governing from campaigning? Should there be firmer rules in place to distinguish campaigning activities from governing activities? Those things clearly won’t be addressed anytime soon, but I think the lesson is that over-campaigning for the purpose of winning elections, while clearly enticing, can become a vicious trap that makes it difficult to govern with any real grounding even after the election is long over; it’s not so easy to just lay down the campaigning gloves one day and pick up the governing gloves. In President Obama’s case, that is partly because he happens to be a gifted campaigner (and for all I know may feel most comfortable in that role). But it is also because we’ve developed an attitude that glorifies winning — or holding a poll-positive position on an issue — above all commitments to govern with purpose. Campaign fakery, while not exactly a closet issue anymore, has an insidious distancing effect, I think, that is much harder to contain than is commonly thought.

The Shrinking Public Sector

Floyd Norris at the Times shows us some economic trends from the first three years of Obama’s presidency:

For the first time in 40 years, the government sector of the American economy has shrunk during the first three years of a presidential administration.

Spending by the federal government, adjusted for inflation, has risen at a slow rate under President Obama. But that increase has been more than offset by a fall in spending by state and local governments, which have been squeezed by weak tax receipts.

Here’s the comparative analysis:

Of the administrations shown, overall growth in Mr. Obama’s first three years has been the slowest. But that is largely because government spending did not accelerate as it normally does when the private sector is weak. The private sector grew faster in the first three years of the Obama administration than it did in three of the previous five administrations — the exception being Bill Clinton’s administrations, when private sector growth was more rapid. In both of George W. Bush’s terms as well as in the first three years of the George H. W. Bush administration, though, the private sector grew more slowly.

The individual point about the slight contraction of the public sector could easily be deployed as political fodder by Team Obama, but I think it better serves as one point among many to highlight the continuing mediocrity of the recovery. Tax receipts and investments are down on the state and local level, aggregate real output is down, and overall growth is slow. The private sector has grown decently, but public sector layoffs (a driver of declining state operating expenses) continue at a steady clip.

There’s a sentiment out there that public sector contraction is always a good thing and an important policy aim, but I think this data shows why that’s a flawed notion. First, it’s historically ignorant; the public sector has expanded under almost every presidential administration in the nation’s history. Second, while it might be difficult to posit a general causal relationship between a shrinking public sector and overall economic performance, in the present moment it certainly doesn’t make sense to cheer public sector shrinkage in isolation. The things that have been done to keep the public sector from growing — laying off teachers, slashing tax revenues, cutting infrastructure investment, and so on — are not known to be drivers of long-term economic growth.

Limiting public sector growth is a policy preference that some people hold, to be sure, but it does not strictly correlate with a strengthening economy. We are still in the midst of a slow, sputtering recovery, during which a variety of less-than-desirable policies have been enacted to satisfy various political constituencies, and I don’t think it makes sense to get too worked up about any one economic outcome without looking at the big picture.

How Do You Quantify Progress?

Michael Clemens at the Center for Global Development has an optimistic piece about declining infant mortality rates in Sub-Saharan Africa. This is good news no matter how you slice it, though I am always skeptical of the view that data like this connotes a level of progress that we should all be giddy about. Here is Clemens’ take:

This is a stunningly rapid decline, and nothing like it was occurring even as recently as the first half of the decade. For comparison, the Millennium Development Goal of a 2/3 decline in child mortality between 1990 and 2015 translates into a 4.3* percent annual decline in child mortality. In other words, the above countries are collectively reducing child mortality at an annual rate much greater than the rate called for by the Millennium Development Goals. They are doing this across hundreds of millions of people, across a vast landscape of hundreds of thousands of villages and cities.

I wouldn’t quarrel with the notion that declining infant mortality is an indicator of progress (even if the metric being used — the “Millennium Development Goal” — is an entirely arbitrary yardstick most likely developed by a first-world-based think tank). In 2012, in one of the poorest parts of the world, you have an infant mortality rate that, if I had to guess, is probably lower than it was in the American colonies in the 16th or 17th century. Does that mean that the quality of life in Sub-Saharan Africa is rising relative to North America or Europe? No, but it’s still a hopeful and somewhat scientific way of looking at aggregate world progress over time. Maybe it’s not an appealing framework for people, such as Thomas Nagel, who remain concerned that “we do not live in a just world,” but it is a framework nevertheless.

Whenever I see this sort of data, though, the question that arises in my mind is whether it’s useful to talk about progress if long-standing disparities aren’t being addressed. Some people would argue that while you could bemoan the quality of life of a poor family living in Oakland in 2012, that family still has lots of nice things that the super-rich of centuries ago didn’t have: running water, color television, cars, etc. The point of that argument is to show that aggregate progress, driven by advances in technology, is a tide that lifts all boats, and that generally speaking, all people (the lower class and poor included) are better off right now than they were at any point in history. That is all fair to say and supported by the data, but it sidesteps the key issue that I think people are making when they talk about the condition of global justice: namely, that huge disparities still exist in the quality of life between rich and poor, and that those disparities are readily apparent in any comparative study done on infant mortality, life expectancy, median income, etc.

In other words, to say that Sub-Saharan Africa is doing better than it was seven years ago is good, but it is not the same thing as saying that Sub-Saharan Africa is gaining on the first world according to some set of metrics. That sort of shift — even if very gradual — towards a more egalitarian world would represent real progress, I think, in the eyes of those concerned about global justice.

Clay Christensen on Innovation and Causation

Bradford Wieners profiles Harvard Business School professor and business theorist, Clay Christensen:

At the turn of the century, The Innovator’s Dilemma became a surprise best-seller and a holy book for entrepreneurs in Silicon Valley, where Christensen’s theory arrived ready-made to explain what Internet companies were going to do to established businesses. Andy Grove swore by it. Steve Jobs admired it, although Jobs’s biographer, Walter Isaacson, points out that Christensen predicted that if Apple kept on using only its own software, the iPod would likely remain a “niche product.”

Pointedly, Christensen demonstrated that it wasn’t because of obsolescence or ineptitude that top companies falter, the way General Motors did after Toyota Motor rose up (and the way Toyota is now, under pressure from Hyundai Motor and Kia Motors). Rather, what caused executives and companies to fail was doing everything right. They listened to their customers, constantly improved their products and services, and maximized profits. Their undoing came from failing to do something counterintuitive: pursuing new opportunities at the low end of their markets. Hence, the dilemma of Dilemma: When do you cannibalize your own business in order to save it?

I don’t doubt this was a radical concept when it was first introduced, although I think there is some dissonance between a theory — Christensen’s or any other — about why companies fail, and the hardcore reality of the innovation-profit life cycle at most companies. Apple and Facebook, for instance, rose to great heights by being the boldest innovators in their respective fields, but they have both since slid into business models that involve a slower pace of innovation and continuously higher profit targets. This has something to do with the market’s demands upon a public company, to be sure, but it also has something to do with the fact that business ideas are necessarily finite things. Facebook is now flirting with the idea of becoming a glorified advertising company in order to boost revenue, but no one sees it entering a lot of disparate markets or cannibalizing its social networking operation in order to hew to Christensen’s theory of continuous, reckless innovation. The main goal for Facebook now is to make more money each quarter to keep its investors happy. Mark Zuckerberg, for all I know, may go on to start up a bunch more innovative, successful companies after he leaves Facebook, but there isn’t much room to radically change Facebook’s core offering without turning it into an entirely different venture. Yet, as the CEO of a newly public company, Zuckerberg still has to figure out a way for the company to maintain profitability, which is a kind of innovation in itself.

That idea — that the market incentivizes certain types of innovation and not others — is one that I think is grossly underestimated by private sector true believers. Innovation is quite a broad concept, and if it gets conflated with financial success, it can be altogether misleading. There is innovation in the sense of Mark Zuckerberg and Steve Jobs developing new products that revolutionize the consumer experience. But there is also innovation in the sense of GE sidestepping taxes and environmental regulations, financial firms establishing lucrative rent-seeking arrangements with the government, mature tech companies cutting costs by engaging in massive outsourcing efforts, and so on. None of that delivers any real benefit to consumers or society at large, but who’s to say that doesn’t count as innovation? I don’t think anyone would suggest that GE or Goldman Sachs or IBM needs to self-cannibalize, yet all of them are doing quite well financially.

Wieners emphasizes Christensen’s rigorous focus on causation rather than correlation throughout the article. That’s an interesting point about Christensen’s intellectual habits, but also somewhat curious given that “disruptive innovation” fails to be prescriptive in a lot of instances. GM and Toyota might have declined because of a failure to disruptively innovate, but many other companies have gone into decline for entirely different reasons. By the same token, Apple and Facebook might have beaten out their competitors by being better and bolder innovators, but there are other companies that have achieved success by sticking to a safer growth model. Christensen might want to say something like, “disruptive innovation causes success,” but I don’t see that the evidence supports that strong a conclusion. A causal theory, in the strict sense, has to be prescriptive, and I think it’s telling that this is precisely the area in Christensen’s work that his critics have singled out as problematic.