Taxes and truthiness

Battle lines are being drawn by both US political parties around this issue, as both sides try to deliver fodder to their loyal base.  Republicans are adamant to expand the tax cuts to everyone, whereas Democrats want to limit the cuts to families making $250k/year.

First let us look at the Republican argument which frames this as tax increase on the wealthy, while in reality it is the non-extension of tax breaks.  There is a distinction here, if you remember why the original tax cuts were passed by George W. Bush.  Thanks to the Internet, we can go back and look at the rationalization from the right. a) It is not that big of a tax cut – only 5% of total revenues – said the Cato Institute.  b) Budget surpluses Republicans inherited from Clinton administration means the people are overcharged and they need a refund, said George W. Bush, and c) tax cuts promote jobs (pick your favorite Republican stump speech).

Fast forward to 2010: a) the same argument of rolling back taxes should be true now.  In fact, since the economy has grown, it is a smaller percentage of total tax revenues.  b) Just like many experts warned, the surplus has turned into huge deficits.  By the same arguments, the refund should not be extended, since there is no surplus now, and c) 9.8% unemployment with end in sight.  If you can somehow explain tax differences account for job losses in the US and extremely fast job growth in India and China, this one is DOA.

May be the majority of the population doesn’t care about facts or can’t digest them.  This shouldn’t giver license to both parties from at least framing debate around facts.

Fact: The difference between Democrats and Republicans amounts to 3.6% marginal rate on people making over $250k.  What does it mean?  It means, every $250k OVER the first $250k, gets 3.6% increase.  This means, family making $500k would see $9k increase/year in their tax bill.  That is less than $800 per $42k they make a month.  Hardly crippling. See table below from the tax policy center

When one side starts repeating half-truths loudly and other side is meekly mumbling something, people, especially busy or inattentive people will draw conclusions that louder person is right.  Democrats – join the debate and state your case or let’s copy Chinese and go to one party system. At least something will get done.

One final thought, I find this whole idea of giving Congress power over taxes absurd.  It leads to unnecessary and absolute powers which always gets misused.  You know what they say about absolute power.

Wikileaks – strategy bites back

Your view of Wikileaks.com will depend on where you are sitting.  If you are one of those people who hate US, you are happy and curious about what has been leaked.  If you are a believer in US intentions, you are appalled and worried about the fallout.

My observation about this is the pattern of flip-side of a strategy shift.  After 9/11 commission report, one of the major findings was that how CIA/FBI/NSA/DOD, other federal alphabet soups and local agencies were not able to share information to prevent attacks.  So, department of Homeland security was created and lot of money was spent to make systems interoperable and data widely available.  This proliferation of sharing made it easy for few bad actors to cause major damage by stealing data.  Why didn’t the government put in safeguards or chain of custody for sensitive data?  Because that was not a priority – making data widely available was the main goal.

Lesson for organizations, especially when they shift strategies: make a detailed analysis about flipside risks when you embrace new strategies.  What you don’t know CAN hurt you.

Politically, this is a mess.  US government has to fight this theft while not being heavy-handed at either the leakers or publishers.

The whole world needs to rethink their attitude towards private data.  If someone stole bunch of objects (cars, printers, paperclips, you name it) from the US government and tried to sell/give away to foreign nationals, the very same people peddling the wikileaks content would find it criminal and would stay from the deal.  Our sense of outrage for stolen data has to reach the same level.  Google, Facebooks of the world have desensitized  us for data ownership.  It will take few more scandals and many years for this to change.

National strategy

Contrary to the laissez-faire capitalist view, having a national strategy is important.  Andy Grove, one of the best strategists of our time, writes eloquently about where US strategy of profit-driven offshoring has gone wrong.   My favorite excerpt:

The story comes to mind of an engineer who was to be executed by guillotine. The guillotine was stuck, and custom required that if the blade didn’t drop, the condemned man was set free. Before this could happen, the engineer pointed with excitement to a rusty pulley, and told the executioner to apply some oil there. Off went his head.

We got to our current state as a consequence of many of us taking actions focused on our own companies’ next milestones. An example: Five years ago, a friend joined a large VC firm as a partner. His responsibility was to make sure that all the startups they funded had a “China strategy,” meaning a plan to move what jobs they could to China. He was going around with an oil can, applying drops to the guillotine in case it was stuck. We should put away our oil cans. VCs should have a partner in charge of every startup’s “U.S. strategy.”

The profit-motive is a very strong instinct for corporations, since it dictates their very survival.  They will do everything within their powers to influence the public policy, in order to keep the profits flowing.  Just like corporations can fall prey to short-term profits at the expense of longevity, government policies can get stuck “applying oil to the guillotine”.

How not to design customer support

The only goal of every customer support interface ought to be to get the customer as quickly as possible to the best person to help with the problem.  Complicated menus, myriad options, endless redirections and exposing artificial walls to customers not only gets in the way of solving customer problems, it exposes your organization’s incompetence to the world.

Just look at Verizon’s home screen for help:

https://www22.verizon.com/Content/ContactUs/CallUs/callus.htm

Once you reach any of the numbers listed there, you have to navigate through layers and layers of voice prompt menus.

The pressure to reduce costs in customer support is understandable, but the end result of unnecessary complication is hardly warranted.   I would be okay with answering these questions on a webpage from their page and getting a special code, which I can dial to get directly to the right person would be a great improvement.  Many ideas look cool or even efficient when engineers are implementing them.  When they start taking a life of their own and grow to complicated mess, both the organization and customer will end up getting frustrated.

Wealth gap

Businessweek recently published ranking of countries with most millionaires.  Not surprisingly, US topped the list and China is moving up fast in third place.

What caught my attention was the percentage of wealth controlled by this elite group in each country.  In US, millionaires comprise of 1.5% of population but control 56% of total wealth.  Similar number for other countries:
Japan:         1%    control   21% of wealth
China:        0.5%  control  50%
UK:            0.8%  control  23%
Germany: 0.5%  control  22%
Italy:         0.5%  control  27%
Switzerland: 4% control  44%
France:      0.4% control  19%
Taiwan:       1% control    37%
Hong Kong: 3% control   73%

China region (if you include HK and Taiwan) and US are leading the world in concentration of wealth.  One is leading the world in growth and the other is struggling to hold on to its wealth.

Another interesting graph that shows how the wealth distribution has changed over the last century in US.  Major driver has been the reducing tax rates for the top bracket.

Here’s another article from Business Insider that chronicles the growing disparity in the US with some sobering charts that show how the wealth since 60’s has gone to from masses to top 1%.  Here’s the chart from BI that shows tax rates and wealth concentration:

Warren Buffett laments that his tax rate is lot lower than his secretary’s.  While giving the profligate US government more money through higher taxes on the rich seems like a bad idea, the growing disparity is not sustainable either.   Americans like the government to stay out of their lives, but they also don’t like the feudal system that is rigged to help the rich.

Disruptive Innovation

PBS program Frontline recently covered the private college industry, in which how the government-backed (now government-run) student load programs have fueled a $400B education industry.   I had several reactions to this program:
1. Unintended consequences: Any time the government wants to do something, the ‘legal arbitrage’ – where private companies figure out perfectly legal, but questionable methods to profit from the government program.  Government will first react with lawsuits, hearings and finally a new law to close THAT loophole.  Then the cycle repeats.

2. Public universities have been doing a poor job of educating undergraduates for a long time and the tuition fees have been rising faster than inflation for couple of decades.  Christensen’s disruptive innovation comes to mind: the universities are really good for advanced research, but they have overshot the needs for undergrad education – especially for the basic first couple of years.   It is just too expensive to have a chair professor teach a class of 25 undergrads how to solve differential equations.  So, such tasks are increasing relegated to adjunct faculty, teaching assistants and now, increasingly to computer software.  When I walk by this huge warehouse with rows of computer terminals teaching students math courses, I wonder why the students don’t demand lower tuition for these courses, though it costs lot less for the universities to run them.

Why are universities able to get away with providing such poor value?  Bundling and Branding.

3. How incumbents react to threats: Incumbents are definitely hurting.  Between the rising expenses, reduced government spending on education, reduced alumni contributions and increased competition, many lesser known universities are struggling.  When threatened, they are either coopting – but providing online programs to match the for-profit schools or moving upstream – by letting the students go to community colleges for two years and transfer credits.  However, high fixed costs of a large university makes it difficult to pull it off.  Considering how difficult it is to get any group of academics to agree on anything, for-profit colleges have a big advantage and will change the face of higher education in coming decades.

Making your job obsolete

If I had to sum up my philosophy on how any person, organization, corporation or country could grow, it would be ‘focus on making everyone’s job obsolete’.  It may seem too simplistically obvious while being difficult to implement in practice due to basic human nature.  It is obvious that by increasing productivity to the point of making one’s job obsolete, you can reap the benefits of efficiency and resulting growth in wealth.  However, as human animals, we all seek a certain amount of predictability, if not absolute stability.  Our nervous system is wired to make us nervous at any change since this is how we respond to dangers.  Our mechanism for detecting danger is noticing any change in our surroundings.  Hence we have this paradox for success: you have to make change not seem scary by making it the norm.  Just like we ignore ambient noise of birds chirping (or car noise if you live in a city).

My organizational goal is to get to a place where everyone’s goal is to make at least part of their job obsolete.  When I have attempted to do this, I have got most support from the superstars of the organization and most opposition from the bottom performers.  This is neither coincidence nor hindsight bias.  People with least job security falsely assume that they will be hard to replace due to their seniority in the job function.  Au contraire, the longer you have been doing something, more your chances of getting replaced in the current world.   In the current growth phase of the world economy, there are more people than there are jobs.  People at the lower rungs of the ladder are always looking to move up and take your spot.  Why not use this to your benefit instead of fighting it?

An organization needs to set short and long-term goals for itself and all its branches and leaves to make part of their job obsolete every quarter and track the progress.   When combined with strategic goals and communicated well, this becomes a tremendous engine for growth.   At the organizational level, it can be a way to increase operational efficiency but when implemented well, this is also way to energize and grow the most important asset – people.  If every manager makes a list of his/her tasks and makes it a goal to delegate part of the tasks continually, what you have is an organization that is growing in skill and efficiency.  Without considering the benefits to the morale, just the fact that a task is being done by a lower paid employee than before makes this a no-brainer.

To be sure, starting such a disciplined approach and sustaining it is hard, especially when people feel insecure about their jobs.  It is the leaders’ job to allay such fears and make people embrace the approach.  It will require new levels of transparency, honesty and increased communication – a tall order if the management does not believe in the growth model.  By treating people with respect, investing in their future and trusting them to do the right thing is what an organization needs to do consistently before attempting this approach.

It is easy to see how managers can make their jobs obsolete by delegating or using tools.  How about the low-level workers?  Who do they delegate to?  The answer is: to a more efficient place.  Sometimes it is to another country, but many times it is just automation or innovation.  It seems too much like Toyota’s continuous improvement system (TPS) because the approach makes sense in a manufacturing operation.  By reducing the seven wastes (muda): overproduction, waiting, transportation, unnecessary processing, excess inventory, unnecessary motion and defects,  one use set of tools and language to drive operational efficiency.  However, other types of organizations, and even other pars of Toyota don’t follow this model since a) it is difficult to measure and b) difficult to implement.  By making everyone’s job obsolete a corporate goal you solve both these problems and get to a culture of continuous improvement with a smile.

The Airline Spirit

Recently, Spirit Airlines announced that they will start charging $45 for carry-on luggage.  Fees for check-in bags made more people avoid check-ins and prefer to carry-on their stuff.  Now they are irate over fees for carry-ons announced by Spirit.  Even US Senate is taking up the issue, thinking that Airlines are using this to dodge taxes they pay on ticket prices.

I can’t help but wonder whether things would be different if airlines chose a different tack: give discount to light travelers instead of fees for bags.  Effectively, it should be the same – people with bags pay more than those without, but human nature will see it differently.  Travel light and get a voucher for $45 towards your next flight.  It may even increase loyalty among the ideal demographic due to this voucher they need to use.  Airlines could give you frequent flier miles as well for not bringing any carry-on luggage.   Customers will view the discount more favorably than the fee (numerous studies have been done by economists proving this point).

This is similar to failed attempt by Coke to have smart vending machines that increased prices during hot days.  It failed, since people saw it as profiteering.  However, if Coke just reduced prices on colder days, there would no outrage.

Simply raising the prices on everyone and then discounting has its own downside.  Unless the lower effective price is what customers associate with the product (instead of higher initial price), competitor will steal some price-sensitive customers, based on this perception.

Apple’s 3.3.1 problem

Apple locks horns with developers…again.  This time over a section in new agreement for the 4.0 SDK requiring ‘pure’ Apple code without the use of third party platforms.  I remember they prevented people from developing such frameworks in the first place (otherwise an app could get into app store and then sell plugin apps to others).  The new infamous section 3.3.1 goes one step further…

3.3.1 — Applications may only use Documented APIs in the manner prescribed by Apple and must not use or call any private APIs. Applications must be originally written in Objective-C, C, C++, or JavaScript as executed by the iPhone OS WebKit engine, and only code written in C, C++, and Objective-C may compile and directly link against the Documented APIs (e.g., Applications that link to Documented APIs through an intermediary translation or compatibility layer or tool are prohibited).

Uproar and numerous comments for both sides are here: A brief assessment of Jobs’s iPhone OS defense.

I have admiration for the boldness of the strategy as well as excellent timing for each of the moves.  In the long run, I have doubts about this strategy sustaining itself – but that could be a long time for Apple to make its billions.  As Keynes once said – in the long run we are all dead.  The bet Jobs is making is that a vertical integration model of controlling soup to nuts is going to result in better products and customers will pay a premium for the ‘it just works’ brand.  Especially in fast evolving markets, such as early days of personal computers (before they became PCs) and early days of smart phones and ubiquitous computers.  This market, like others will saturate (around 2015?) and the market will move towards consolidations and common standards.  Apple here wants to be the next Microsoft, or at least prevent spawning another Microsoft to kill its products.

There is no such thing as half-pregnant.  Apple is demonstrating that it not only believes in the vertical integration model, but is willing to run over few fans (and Adobe) to achieve it.  Several blogs have covered all aspects of why this is a good move and why it isn’t.  But the big picture remains, when the next big thing from Apple stops becoming a craze, Apple will fall into the classic trap of managing cash cows and trying to invent the next big thing.  The cash cow people and new thingy people will start bickering and open the doors for cheaper competitors ready to move upmarket.

What is flip-side of this strategy that can wreck havoc for Apple?  It is always the unexpected third front while all the energy is focused on its immediate threats – Adobe and Google.  Someone will crack the magic of cool hardware, open software platform, robust tools and trusted ecosystem.  Will it be Android?  Microsoft’s Mobile 10? Nokia?  Palm?  My money is on the ones with most money to spare – GOOG and MSFT, since this is not a sprint.

Apple and China

China is doing an excellent job of balancing growth and freedom – in this case freedom for ‘pursuit of happiness’ by moving to urban areas.  As these graphics illustrate, China is moving large chunks of rural population into its 669+ million people cities (US has 12 such cities) in an orderly fashion while the disparity of income grows.  Chinese citizens are willing to cede control to the single-party government, trading stability for individual freedom.

This is similar to what Apple is doing with its customer base, across national borders.  People give up their choices for what they believe is  better experience and stability.  After years of watching Wintel machines battle viruses, spyware, blue-screens-of-death, mind-boggling choices and illusion of choice while Windows controls 90% market, people looked to Apple as the savior.

I know, comparing Steve Jobs with Hu Jintao is a stretch, but from the strategic point of view both see the vertical integration model as a better alternative for the consumer than the free-for-all alternative pushed by the competition.  Talk about dissidents, censorship and floating yuan reminds me of the iphone jailbreakers, App store and closed ecosystem of Apple world.  But you have to agree that both are beating their competition with their benevolent dictatorship approach to world domination.