Four Things I Learned This Week

I have not written a "things I learned this week" post in quite a while.

I continue to see and read interesting things each week. This was a particularly good week for interesting information and insights.

1. Over 30% of evening internet traffic is the sole result of people watching Netflix. YouTube gobbles up another 19% of downstream traffic according to Sandvine.  Facebook only uses up about 1% of internet bandwidth.  This certainly provides a new perspective on what all those "couch potatoes" are now doing with their time.

Top 10 peak period applications, North America, fixed access. Courtesy Sandvine via TheGuardian.com

2. Pages of tax rules and regulations to interpret and implement the Federal Internal Revenue Code

• 1913-400
• 1954-14,000
• 1995-40,500
• 2014-74,608

This is called progress?  

3. Facebook is paying $19 billion for a company with an app, WhatsApp, that I never heard of until this week. However, 450 million people around the world  use WhatsApp and 75% of them use it every day. They are also reportedly adding 1 million new users a day.

How does that $19 billion compare to other tech acquisitions?  Facebook paid $1 billion for Instagram, Google paid $1.65 billion for YouTube and $12.5 billion for Motorola and Yahoo paid $1.1 billion for Tumblr.

At a $19 billion market cap, WhatsApp is considered more valuable than Gap ($18.9b), Campbell Soup ($13.6b) ConAgra Foods ($12.3b) and Best Buy ($8.7b)

It is estimated that WhatsApp, which allows its users to text each other without going through traditional phone carriers like AT&T and Verizon, cost these providers $33 billion in lost text message revenue last year. This is projected to grow to $54 billion by 2016.

It is a world that is changing very, very fast with potential disruption to traditional revenue models coming from everywhere you look.  By the way, WhatsApp has a grand total of only 55 (soon to be very, very rich) employees.  It was founded in 2009.

4. At its inception in 1966, Medicaid covered 4 million people and cost $800 million per year in inflation adjusted terms. In 2012, Medicaid spent $251 billion on 55.6 million people. Medicare spent $471 billion in 2012. The comparable number (inflation adjusted) in 1967 was $2.8 billion.

That is a 31,212.5% increase in real spending on Medicaid and a 16,750% increase in Medicare spending.

You can see a full report on the growth in the costs of government health care programs in this report prepared by Senator Tom Coburn.

And we are now well on the road to handing even more control of health care spending to the federal government?  We all should be more than a little concerned based on this history of government involvement in health care.

Seen and Unseen

I came across this insightful observation last week in John Mauldin's Thoughts from the Frontline blogger quoting an essay written by Frederic Bastiat in 1850, "That Which Is Seen and That Which Is Unseen".

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

I think this observation also applies in explaining the differences between Democrats and Republicans.

I have always believed that a fundamental difference between a Democrat and Republican is how they view the world. Democrats see the world in much more theoretical and idealistic terms. Republicans tend to be more practical and pragmatic in their outlook.

Democrats want policy solutions based on how they think the world should work in theory. Republicans favor policies based on how the world really works in practice.

Bastiat's essay has given me one more perspective on the difference in thinking between Republicans and Democrats.

Democrats generally confine themselves solely to visible effects.  They seem to consider only first-level effects and ignore everything else that might flow from that.  All of their focus is on what they see in front on them.  They ignore the unseen issues. Republicans, on the other hand, are considering both the immediate effects and second-level effects. The seen and the unseen.  Especially the unseen effects which should be foreseen.

Let's look at a few issues that show you what I am talking about.

Deficit spending- Democrats focus almost solely on spending more on today's needs that they see. Continuing to borrow and spend money we don't have is totally justified over what that debt will do to unseen generations in the future.

Healthcare reform- Obamacare was justified in Democrat minds in order to solve the immediate problem of uninsured Americans.  They totally ignored the fact that the solution would completely undermine the health care system for unseen millions of Americans who already were satisfied with their coverage.

Minimum wage- Democrats want to raise the minimum wage because they believe it will alleviate the poverty problem they see.  However, they totally ignore the unseen after-effects in that the minimum wage increase will undoubtedly result in long-term job losses. For example, the CBO estimates that raising the minimum wage to $10 per hour could result in the loss of 500,000 jobs by 2016.

Immigration- Democrats want to legalize millions of immigrants who have entered the United States illegally and who we see everyday around us.  However, when calling for this they totally ignore the unseen potential immigrant who has been waiting patiently in line for years to come to this country illegally.  They also don't consider the effects that amnesty will have on encouraging even greater illegal immigration in the future.

Welfare-  Democrats can't do enough to help people in need that they see.  Food stamps, housing assistance, Medicaid, long-term unemployment assistance.  It is natural to want to help people who need the help.  However, what about the unseen problem that in all of this we may also be creating a cycle of dependency?  In the end our compassion may feed the problem rather than solve it.

Abortion- A woman who is pregnant is seen and known.  An unborn baby is unseen and unknown for most Democrats. We see the life affected today with that pregnancy.  The life of that baby's future is unseen.

Gun control-  A person with a gun who uses it in a horrific crime is seen.  Democrats see that.  However, unseen are the millions of guns in the hands of law-abiding Americans as well as the thousands of crimes that may have been deterred by that fact.

My point is that it is easy to see visible effects.  They are right in front of you.  However, as Bastiat observed over a century and a half ago, we rarely see single effects, but a series of effects.  Good government policy should dictate that we should not be focusing on the seen, but on the unseen.  This is particularly the case with the unseen effects that should be foreseen.

Unfortunately, Democrats consistently seem to be only interested in what they see right in front of them.  They seem to believe we live in a simple, superficial, single dimension universe.  The fact is that our world is getting more complex everyday and that type of thinking is a sure road to ruin.

As we look at government policy we need to not only consider what we see right in front of us but what is also down the road and around the curve.  It takes deep thinking.  On issue after issue it is hard to detect that Democrats see it.

This observation might have been unseen to you before.  I hope that you see it now.

Of Fish and Ponds

Is it better to be a big fish in a small pond or a small fish in a big pond?

This is a question that I have pondered over the years.  Thinking about myself as well as for my children.

There are obvious advantages to being the big fish in the small pond. Competition is not as stiff in the small pond and this can be an advantage in building confidence.  It is simply easier to compete by getting a chance to practice and hone your skills without feeling inferior along the way.

However, in the long run we all have to compete in the big pond.  And the pond has gotten even bigger over the years with increased mobilization and globalization.  At some point you have to test yourself against the best.  After all, it is only by going up against the best that you can have a chance to be the best. But which is the best path to travel to get there along the way?  The small or big pond?

Malcolm Gladwell in his new book, David and Goliath, seems to come down pretty firmly on the side of the big fish in a small pond.

A big part of the reason deals with the belief you have in yourself. And that also has a lot to deal with whether you will continue to put the work in that is necessary to succeed over the long term.

The small fish in the big pond is much more likely to get discouraged and quit because they think they are not good enough.  The big fish in the small pond does not feel that way.  Each success reinforces their belief in themselves.  They continue to practice and work and, as a result, they also get better and better.  At some point they may move to the big pond and they can be very successful.  Starting in the big pond right from the start they very likely would never would have made it.  They would have quit in discouragement thinking that they could not measure up.

This occurs because we form our impressions of ourselves by looking locally, not globally.  We don't compare ourselves to the broadest group but to those immediately around us.  That is our frame of reference.

Gladwell makes the point by asking which countries have the highest suicide rates?  Countries such as Switzerland, Denmark or Iceland whose citizens say they are very happy.  Or Greece, Italy or Portugal where people consistently say in surveys they are unhappy?  The reality is that suicide rates are much higher in the "happy" countries. After all, it must be much harder to hold it together if you are depressed in the midst of a sea of smiling faces.  On the other side, misery does indeed seem to love company.  If everyone is unhappy in the same boat it doesn't seem quite as bad after all.

According to Gladwell, all of this should cause some concern when considering the real value of affirmative action programs which are designed to assist disadvantaged minorities.  These programs are clearly well-intentioned. However, looking at the big picture, is it really helping these groups?

Gladwell cites data which indicates that black students are routinely offered positions in law schools one tier higher than they would otherwise be able to attend.  However, 51.6% of black students in U.S. law schools are in the bottom ten percent of their class and 75% fall in the bottom twenty percent.

Why is this important?

Research by law professors Richard Sander and Stuart Taylor indicates that getting great grades at a good school is better than getting good grades at a great school when entering the legal job market.  For example, a top fifth class rank at Fordham had jobs and better compensation than a middle class rank at much more prestigious Columbia Law School.

How does Gladwell sum it up?

Parents still tell their children to go to the best schools they possibly can, on the grounds that the best schools will allow them to do whatever they wish. We take it for granted that the Big Pond expands opportunities, just as we take it for granted that a smaller class is always a better class.  We have a definition in our heads of what an advantage is-and the definition isn't right. And what happens as a result? It means that we make mistakes. It means that we misread battles between underdogs and giants. It means that we underestimate how much freedom there can be in what looks like a disadvantage. It's the Little Pond that maximizes your chances to do whatever you want.

I came across this graphic from Boom Football that also makes the point quite well by comparing the Super Bowl rosters of Seattle and Denver based on how highly recruited the players were coming out of high school.  The number of stars indicate how highly the athletes were ranked by college football recruiters.

Note that on both the Seahawks and the Broncos rosters the number of 2-Star and Unranked players is higher than the 5-Star and 4-Star players.  The reality is that the elite BCS (big pond) programs (Alabama, Notre Dame, Ohio State, Texas, USC etc) rarely even recruit an athlete that is 2-Stars or below.  These kids end up at smaller schools (little ponds) where they have a much greater opportunity to play and develop their skills.  On the other hand, many 4-star and 3-star recruits at the bigger schools may get little playing time and never progress.

Who ends up in the NFL?

Don't underestimate the small pond.

Inconsistent, Incongruous or Insane?

When I look at federal policy across the spectrum of issues it is hard to not scratch my head quite often. Inconsistent? Absolutely? Incongruous? It seems so. Insane? Perhaps.

Let's see what I am talking about.

We have 92 million Americans of working age who are not working.  The unemployment rate is stubbornly high almost six years after the economic downturn of 2008.

However, many employers say that we need to reform our immigration rules to allow more workers into the country because they can't fill the jobs that they have.  This clearly points to an educational   system at the high end of the job market where we are not producing the right number of graduates (tech, engineering, science).  At the same time, the low end jobs can't be filled because we have established a welfare system that makes it more attractive to stay on the dole than work.

So the answer is to let millions of more people into the country when so many Americans are not working?

We are also hearing calls to raise the minimum wage.  Minimum wage workers tend to be young. Although workers under the age of 25 only represent 20% of all workers, they make up about 50% of all minimum age workers according to BLS data. 

Those under age 25 also have an unemployment rate that is more than double the overall rate according to the most recent BLS report..  For example, the unemployment rate for those 16-19 is 22.0% and it is 11.9% for those 20-24. This compares to a 5.4% unemployment rate for those 25 years and older.  Bear in mind, the unemployment rate only considers those that are actively seeking workers.  This does not include any young people in school.

Therefore, what exactly will an increase in the minimum wage accomplish?  It certainly will not result in assisting any of these young people to get a job.  In fact, basic economics suggests that it will result in an increase in unemployment.

An increase in the minimum wage will almost assuredly result in greater incentives for business to further automate to eliminate low wage jobs.  Why do you need a person to take your order at McDonald's?  Just put your order in on a touch screen. No need for a human being to do that.  The machine also never shows up late for work.  Or complains about their workload. And there is no FICA taxes or health insurance coverage to be paid.

McDonald's is already in the midst of adding touchscreens in 7,000 of its restaurants in Europe.  Is it any coincidence that this effort has gone into Europe first with its onerous work rules and sky high labor costs due to big government rules?  By the way, Europe also has an overall unemployment rate of 12.0%.

We also have health care reform which was supposed to address the needs of some 47 million Americans without health insurance coverage.

Of course, almost half of the uninsured in the United States is "healthy and young". Asked the question as to why they have not purchased health care coverage previously most of them say that cost is the main reason.

So how was healthcare reform structured to handle this problem?  Obamacare established a slew of mandated benefits that drove up the costs of health insurance across the board. It also required that the old could not be required to pay more than three times the cost of the young for health coverage.  The problem is that actuaries will tell you that the old actually have about six times the health costs of the young.  This means that under Obamacare the cost of health insurance coverage is actually much, much higher than it before for the young.

Predictably, the young and healthy uninsured are not buying Obamacare policies. The health insurer Humana stated last week that only 20% of its Obamacare enrollees are under age 30.  42% are 50-64.  Humana said that they expect to tap into three risk adjustment mechanisms funds under the law of between $250 and $450 million for reimbursement of these losses by the federal government.  These numbers indicate that the policies they sold were underpriced by about 25%.

Therefore, the solution to the problem was exactly the opposite of what was required if the objective was to lower the number of insureds. The net result appears to be that many more people were forced off of individual plans they liked than those who purchased health insurance in the Obamacare exchange.  In fact, it appears that only about 20% of those enrolling in the Obamacare exchange were previously uninsured. People have just been churned from one plan to another.

Do you see why I scratch my head often when I see what is going on in Washington?

Inconsistent? Incongruous? Insane?

You decide.

Steps to Success

One of the first posts that I wrote when I started writing BeeLine three years ago was about Amy Chua who wrote an essay in the Wall Street Journal on "Why Chinese Mothers are Superior."  She also wrote a book on the subject, Battle Hymn of the Tiger Mom.

Chua's essay received a lot of attention and, not surprisingly, a great deal of criticism with her straightforward citation of three main differences between Asian and Western parenting styles as she made the case as to why Asian mothers were raising higher achieving children.

• Western parents are too concerned about their children's self esteem.  Chinese are not. Asians  assume strength in their children, not fragility.  Therefore, they push hard on them and hold them accountable for results.

• Chinese parents believe their children owe them something.  Many Americans seem to believe that since they were responsible for bringing the child into the world that they owe the child in some way.

• Asians believe they know what is best for their children and override their children's own preferences and desires. Chinese parent s understand that nothing is fun until you're good at it. To get good at anything you have to work, and children on their own never want to work, which is why it is crucial to override their preferences.

Having three children who competed in the classroom and in music with Asian children in high school  and speaking with their parents, I understood where Chua was coming from.  These parents generally held their children to higher expectations and strongly believed in the ethic and value of hard work.  To a much, much higher degree than other parents I knew.  And my wife and I for the most part.

Of course, it is always dangerous to generalize.  Not every Asian parent brings their children up the same way. There are Asian kids who are slackers, C students and can't play a C-flat.  However, stereotypes are a fact of life and anyone who denies they don't do it either is not telling the truth or does not understand how the human mind works.

The fact is that we all stereotype because all of our brains use shortcuts to make decisions. It is the way the brain is wired. These shortcut pathways make decision making easier. Our brain is a wondrous thing. Most of the calories we burn in a day go to fuel this enormous power plant. Therefore, the brain always tries to make decisions that use the least amount of effort and energy it can. These shortcuts are called heuristics.

If you are human you use heuristics, bias and stereotypes every day. If you don't know better you are going to start with a default position as you assess things. For example, if you are looking at a product you are not familiar with and you have two items to choose from, you are going to assume the expensive option is better. If you move to a new city and need to open a bank account, you are going to assume that the bank with 50 branches and the skyscraper downtown is better than the bank with one office. After all, if they got that big they must have done something right.

However, as I pointed out in my post earlier this year, Toil, Training and Talent, the success of those Asian students has little to do with innate "talent". It is largely a function of the expectations of the family and just plain old hard work, practice and study.  That is the secret.

Malcolm Gladwell in his book, Outliers attributes it to a "rice paddy" attitude. Simply stated, tending to a rice paddy is a 360 day, 3,000 hour per year activity. It is exacting, hard work where effort and dedication make a huge difference in results. The peasants that tended these rice paddies may be long gone but the culture carries on in their progeny. Gladwell makes the point that there is nothing that indicates that Asians are naturally any better at math, science or music but each requires hard work, persistence and doggedness. It is more attitude than aptitude.

Chua is out with a new book tomorrow (co-authored with her husband, fellow Yale University professor Jeb Rubenfeld), The Triple Package:Why Groups Rise and Fall in America,  which is sure to raise some more hackles and controversy.  In the Triple Package Chua and Rubenfeld explain their belief as to why some religions and races have been more successful in America than others. 

You have to admit that Chua is not afraid of taking on some tough issues for thought and discussion.

First, religion.  Chua states that those of the Jewish and Mormon faith have has outsized success in American compared to their Protestant, Catholic, Buddhist, Muslim, and atheist counterparts.

Second, race or culture.  Indians, Chinese, Iranians, Lebanese, Nigerians and Cubans have achieved a relatively higher level of success in America compared to their counterparts according to the authors.

Or course, some critics of Chua and Rubenfeld see an internal bias in their conclusions since Chua is from from a Chinese culture (her parents) and Rubenfeld is Jewish.  However, my own experiences over my lifetime confirm what they are saying about these groups.  They fit into my own stereotype that would be my default position I had to guess, successful or not?

So what do these groups have going for them? The authors cite a "cultural edge" that allows them to better take advantage of the opportunities that America offers.  They see a "Triple Package" of elements that provides these cultures that edge that has given them disproportionate success compared to their numbers in American society.

What are they?

A superiority complex. Insecurity. Impulse control.

What do each of these mean?

Each of these groups has a basic belief that they are exceptional.  That they are a cut above in contrast to the way most Americans are taught to believe that everyone is equal.  These groups don't believe that. They believe in themselves first and foremost.  

You might ask that if that is the way they feel how could insecurity come into play in "The Triple Package"?  This seems contradictory.  However, I see it as the difference in how they believe others view them.  In their heart they believe in themselves but in their head they know others don't, As a result, they believe they have something to prove, to themselves and others. This drives these groups to outsized success.

Finally, self-control.  This is the ability to delay self-gratification and exhibit self-discipline.  It is also the ability to not give into temptation and quit when the going gets tough.

Of course, none of these attributes is the domain of any group.  Each of these could be readily embraced by anyone in America. Those are the stereotypes coming into play again.

I have not read "Triple Package", only a couple of summaries and reviews.  I am not sure that I buy into everything that I think Chua and Rubenfeld are saying.  However, the basic elements of success that they are writing about here are not much different for anyone in my book.

It starts with your attitude. No one is going to achieve success without believing that they can do it and the patience to carry it through the steps necessary.

John Wooden, the former UCLA basketball coach, called it the Pyramid of Success.  You see many of  the same elements over and over when someone is writing about the secrets of success whether it is Chua, Gladwell or Syed (who I profiled in Toil,Training and Talent). 

Hard Work. Practice. Belief. Faith. Passion. Self -Control. Initiative. Skill. Poise. Confidence.  

There is no secret to success.  It is much like the Super Bowl last night.

It is preparing better. It is blocking and tackling better.  It is covering the field better.  It is taking better advantage of opportunities that you are given.

And in the United States of America, everyone is given opportunity unlike any other place in the history of mankind.  

My wish is that more people believed it and achieved it.  It is there for everyone.

“Whether you think you can, or you think you can't--you're right.”

                                                                                            -Henry Ford