29 November 2015

Motive and Incentive, part the first

One of the driving memes of these endeavors is that motive and incentive are at least as important as data to understanding an economy, both at the micro (especially) and the macro level. Comes an extensive piece which deals with such in the context of The Great Enabler, the Nobel Prize in Economics (which, actually, it isn't really). Economics isn't any more "scientific" than any of the other social sciences, and the last few decades of Right Wing ascendence makes such ever clearer. The quants sought, as the micro set have always done, to remove all value judgment from the field. Doing so is explicitly to support the power center of an economy: more wealth is always better, even when (or, because) such increase of wealth devolves to a 1% or .1% of the economy. Brown nosing and ass kissing by design.

A kindred heart:
A Nobel prize in economics implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modelling, like chemical reactions or the movement of the stars. It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths.

Chemical reactions obey God's, or Mother Nature's, rules over which said chemicals have no control. Thus, the results are by definition not only optimal but also justified. Casting economics as objective analysis serves the purpose. Power centers very much appreciate such rhetoric.

Folks who can bend, break, or change the rules to their advantage will do so. The rest of the flora and fauna of the planet can't do that, modulo some tool making of other primates. But only humans have banks.
GDP, inflation and even growth figures are not objective temperature measurements of the economy, no matter how many economists, commentators and politicians like to pretend they are. Much of economics is politics disguised as technocracy -- acknowledging this might help open up the space for political debate and change that has been so lacking in the past seven years.

I had the displeasure to be a grad student at the University of Massachusetts in the early 70s when the quant types took over the asylum, led by one Vernon L. Smith, Darwinist to the core. After all, the field was originally named Political Economics, and it certainly takes great pains to support its political patrons, often disguising its motives and incentives behind the abstruse. The irony, of course, is that Smith's Nobel was shared with Daniel Kahneman (mentioned in the Guardian piece as a counter-weight to the quants; perhaps the author should have used the Wiki), a psychologist. One wonders whether Kahneman put Smith on the couch?

27 November 2015

Billlions and Billions of Dollars

I've always suspected, just from acquired memory, that the real reason behind pharma's claim that it cost $X billion to bring a "new drug" to market is that drug companies simply don't pull the plug when the data say the drug has little chance of working and/or getting approved. For those who may not know, in the US, there are three sanctioned levels of trial, not surprisingly called Phase I/II/III. These are trials of the drug in humans. Prior to Phase I there are pre-clinical lab tests to, at least, demonstrate that the drug works chemically, biologically in glass, and biologically in non-humans.

Once FDA is convinced that the compound is non-harmful, or least non-fatal, in non-humans, clinical trials can begin. In general:
Phase I -- safety
Phase II -- safety and dosing, and possibly efficacy, in small trials
Phase III -- efficacy in large trials

As a rule, at least two PIII trials demonstrating statistical efficacy and clinical benefit beyond current therapies are needed to ask FDA for approval. The key points in these trials:
1 -- sponsors (aka, drug companies, mostly) are not required to provide the public, or investors for corporations, all data generated or FDA correspondence during development
2 -- FDA is not allowed to release much, if any, data until such time as it makes a marketing approval decision, and then the non-approval (aka, CRL) may be vague

The result of this is that drug companies often continue pouring money down a rat hole. It's what they do. That's my recovered memory of watching the drug business for the last decade or so. Finding clear data on how many drugs with failed/marginal Phase trials are then sent into the next Phase is difficult. Not the sort of information drug companies want publicized.

Part of the problem may just be a naive` view of stats, in particular what a p-value means. And, no, I don't say that as intro to pumping Bayes in clinical trials. Not even.

Then I found this piece. All is revealed.
And, of course, add to all that the entirely avoidable, but nonetheless remarkably prevalent, tendency to progress agents into Phase 3 that did not actually achieve positive Phase 2 findings (at least without the help of unjustifiable post hoc analyses).

So, here is where all that moolah goes:
If, for example, your primary end-point reaches statistical significance but every secondary end-point suggests no effect, its time to suspect the False Discovery Rate. Put another way, don't let the data from one single experiment (however important) dominate the weight-of-evidence. The attitude "well, the trial was positive so it must work - so lets plough ahead" may well be tempting, but unless the broader picture supports such a move (or the p value was vanishingly small) you are running a high risk of marching on to grander failure.

Leading to his conclusion:
Failures in large, expensive Phase 3 trials are the principle cause of poor capital productivity in pharmaceutical R&D. Some of the reasons for failure are unavoidable (such as, for example, the generalization problem). But the False Discovery Rate is most definitely avoidable -- and avoiding it could half the risk of late-stage trial failures for first-in-class class candidates. That translates into savings of billions of dollars. Not bad for a revised understanding of the meaning of the humble p value.

But, of course, drug companies won't do that, since they get to keep their bloated bureaucracies only if they continue to do trials. Cutting off the losers in PI or PII does nothing to promote that. So, they won't.

19 November 2015

You Say M-eye-cro, I Say M-ah-cro

One of the hallmarks, if not raison d'etre, of microeconomics aka The Corporate Perspective, is that macroeconomics is just the sum of all those homo economici maximizing their use of land, labor, and capital. Such argument has been used for centuries to justify all sorts of zero-sum gaming and short-term decision making. Keynes is the most well known but not first to recognize that the welfare of The Tribe amounted to more than the sum of each member's wealth. Arguing against the macro folks is the 1% argument that "only the little people pay taxes"; if you're of the 1% you directly buy your own cops and schools and such.

Short-term decision making is exemplified by "you don't miss your water until your well runs dry". In California, we find the 1% squandering water on lawns just because, today, there still is some water and today's price (which never seems to calculate depletion) is affordable for them.

Zero-sum gaming is exemplified by the likes of Airbnb, which is subject of Australian hearings. The same old story: we should be allowed to slough off social costs, both current term and long term, because we assert that we expand the larger economy. In the case of American sports teams being gifted with stadiums, often fully gratis, the carry-on effects of bars, restaurants, and memorabilia shops are asserted to bring in more commerce and tax on same than the cost of such stadiums and tax abatements. No unbiased study has ever agreed. What has been found, of course, is that such teams pull up stakes for some other jurisdiction which makes a bigger, dumber offer as soon as, or even before, the lease finishes. Such taxpayer/community gifts are only profitable to the community if customers are imported to the jurisdiction from external places; otherwise the community is simply transferring consumption from a loser (movies and bars and OTB) to an adorned winner (Your NFL Team). Plus, that winner gets extra profit from the fact of not paying substantial cost.

Airbnb has a more difficult case to make: it is a pure replacement for some other form of accommodation. What Airbnb gains, some other facility loses. Since Airbnb runs through Ireland, of course, all other countries see no tax benefit of the corporate cash flow. And, of course, all that happens locally is that Hilton loses a customer to Airbnb's rooming house. Such Airbnb facilities are often sub-rosa, so any local accommodation tax goes unpaid. The argument by the likes of Airbnb amounts to, "we're cheaper than X incumbent, so our customers will spend the difference in the locality". I won't stay at Hilton, but rather some stranger's back room, and I'll have dinner at the Hilton bar?? As if that actually made sense as a justification: the customer base spends the same, so let us avoid taxes because we help the larger, local, economy? So, even if the Airbnb argument were true, the net gain to the community is less than $0; the Airbnb sleeper spends the difference between Hilton and its cot. There is no net increase in the local economy. The only justification for taxpayers subsidizing Airbnb (by letting them skate on regs and taxes and such) is if those who sleep at Airbnb wouldn't otherwise be in the locality spending money.

The bottom line, so to speak: when analyzing micro effects, especially quantitatively, be careful not to get sucked into ignoring macro effects, both immediate term and long term. Nearly always you'll find micro actor(s) seeking to slough off costs to the macro world. It's at best a zero-sum game for the macro economy, while the 99% lose 99.44% of the time.

13 November 2015

Dee Feat is in Dee Flation, part the thirtieth

Well, the shit has hit the fan; producer prices continue to tank. All those Austrians keep telling us INFLATION IS HERE!!!!!!! Yet, like Godot, never appears.

Down a record 1.6 over the 12 months. As said so many times, motive and incentive matter more than data to those who pull the puppet's strings

11 November 2015

The Tree of Life

The giant sequoia lives into the thousands of years; ring analysis of all trees shows some wider and some narrower, resulting from level of water, sun, and soil nutrients. More food, thicker rings. Nevertheless, tree growth can be viewed as monotonic increasing in perpetuity. More or less. The same is true of many natural processes.

Unfortunately, the same is not true of human processes, since, unlike trees, we (well, some few of us) control the supporting environment. Sometimes, in some places, the environment is conducive to growth in some aspect of human-kind. Generally, this is due to a self-administered advantage. The banksters, for example, made their $$$ by bending/changing/ignoring the rules of play. They won, and when they were caught cheating, pretty much got away with the filthy lucre. Nice work if you can get it.

Much the same transference of thought goes on in the field of demographics, most often by those who know little about the subject. Josh Barro recently flapped his gums on the subject. Being coy, he framed his analysis with "good news, bad news" meme. Using the title, "Your Kids Will Live Longer Than You Thought" doesn't help.
you need to look at cohort life expectancy, a statistic that adjusts for the fact that death rates tend to decline over time as health and safety improve.

As I noted at the beginning: people live longer today than they did in 1900 not because of some deus ex machina perpetual propulsion, but because some humans figured out how to staunch various methods of early death, notably infant mortality in the period from 1900 to 1960. It wasn't magic, or God, that led to the longer life expectancy at birth. If one goes, as I have urged many times before, and looks at the real data, one sees that life expectancy at age 65 (the metric that matters when discussing Social Security or retirement generally) has increased by a small fraction of at-birth. A really small fraction.

Medicine, these days, is largely concerned with adding a few weeks or months to the terminally ill geezers. Whether we should be wasting so much moolah on geezers is a valid question. The War on Cancer has gone about as well as the ones in the Middle East.
The Technical Panel on Assumptions and Methods established by the Social Security Advisory Board, an independent government agency that advises Social Security's trustees on matters including actuarial assumptions, says Social Security is systematically underestimating future declines in mortality rates, and therefore underestimating the likely life spans of young Americans.

This statement is the Tree Growth Proposal: there's been a continual, but with diminishing incremental effect, decline in early death up to now, so there has to be more decline in the future. We're not trees, and why we die early is mostly up to our behavior. Either we stop doing deadly things (smoking) or we find in medicine (surgeries, drugs, vaccines, etc.) specific therapies to slow or halt specific causes of early death. There is no deus ex machina.

Without specifics as to why, and where from, such future declines will increase I say, "horse shit". We know what causes most early death, and drugs and vaccines have eliminated most of them. Lung cancer has diminished as people are shamed into quitting and not starting. Smallpox is officially gone. Mostly, same for tuberculosis, flu, polio, and so on. The main cause of early death in the Rich West is too many calories, while in the Poor East it is too few.
In the long run, the Social Security Administration assumes the "mortality improvement rate" will be 0.71 percent -- that is, the odds of dying at a given age will fall, on average, that much each year.

Again, more horse shit, without specifics. We are not trees. We won't live longer if you just give us more water and more nitrogen. Gad.

10 November 2015

The Poisoned Apple

Another in the line of missives centered on The Tyranny of Average Cost™ was percolating in my lower brain stem, but not yet putting fingers to keyboard, when what should I see, not tiny reindeer, but this Debbie Downer report on Apple.

Back in the beginning, even before some readers were yet born, Apple was the computer company for the rest of us. An IBM/PC cost in the neighborhood of $5,000 (that's 1981 moolah, btw), while the Apple machines were much cheaper, and less expensive. Then came the Age of the Clone, and the race to the bottom, and so on. With the Mac, Apple became the computer for the upper X%. X being somewhere in the range of 10 to 20. The die, to quote Caesar, was cast.

These days, Apple is largely The High End Smartphone Company. But no one, that I've seen in the popular press, has asked the simple question: can Apple survive without all those low end (and, allegedly, unprofitable) phones flooding the world? And, of course for those following the bouncing ball, not even close. Let's consider a small thought experiment, since dragging out specific data will be arduous if not impossible.

There are a few major fabs: Intel, Taiwan Semiconductor, Samsung, GlobalFoundries.
But $500/wafer is a far cry from the $1,600 or so that a finished memory chip wafer costs, or the $5,000-odd cost of a finished high-end processor wafer. Of that cost half or more is capital depreciation on the equipment that converts the raw wafer to finished chips.

The lion's share of the capital depreciation is lithography equipment, basically cameras on steroids.

Trying to figure out the total shipments of all cpu is beyond my patience. But, if we take the 10 billion/annum shipments of ARM designs as a base, then ask how many of those went into Apple phones, we get some idea of Apple's dependence on foundries' capacity. In 2013, around 150 million were shifted.

So, 150 million out of 10 billion cpu. Apple, as is so often the case with the right wing, is parasitic off the low end. IOW, without all those 9.8 billion other cpu sales, Apple would have to absorb the amortized capex of the foundries all by itself. And this, of course, is the rationale of all those fabless chip companies; get rid of real capital in order to drive up RONA. By the simple expedient of having no assets and charging everything to direct cost. Of course, the assets do have to exist someplace, so from a macro view it's all a shell game. And a zero-sum one, at that.

Ironically, Apple's Watch has been held up as the great disrupter of the Swiss (aka, really really expensive) watch industry; and may not be selling all that well. In fact, it has been the actions of Swatch to stop supplying base movements to the rest of Swiss watch makers. The conflict has been going on for years, but boils down to The Tyranny of Average Cost™: Swatch has the existing capacity to supply all of the boutique watch makers, who themselves individually can't find the capital to create production capacity (which is redundant at the outset). Some of the larger small makers have gone into production of base mechanisms in the last few years, but it is wasted capital, in the macro sense. Swatch's high-end brands now have a cost advantage, in that the capex has been paid for by the boutique makers over the years, while they have had to invest in redundant capacity. The customer and the boutique makers lose, while Swatch wins. Ah, tyranny they name is Rand.

Yeah, I know, this is back of the envelope figuring, but the The Tyranny of Average Cost™ can't be denied. Apple is, through its foundry suppliers, able to cater to the 20% by virtue of the existence of the 80%. Or, as discussed some time ago, if only the 1% get healthcare, they'll demand Obamacare for themselves, since they surely don't want to carry the capex of the healthcare system all by their lonesomes. They may hate, and condemn their oppression by, the 47% but they need the 47% to participate in order to staunch The Tyranny of Average Cost™. If only the 1% get MRIs, how much will an MRI cost? A lot.

04 November 2015

The Tyranny of Average Cost, part the fifth

Regular reader may recall my observation on the folly of Amazon's business model: it's an order of magnitude cheaper to ship by rail than by air. All this building of stores, sorry Fulfillment Centers, was perfect evidence that Bezos sees the problem, but finds the most expensive way to solve it.

Now, of course, Amazon is going into the brick and mortar business. There must be great angst among the pundit class!! Betrayed by Jeff!!

The reason, of course, is it's cheaper to stock a B&M location with the high volume stuff, leaving the high-cost, low-volume stuff to the warehouses. It's only taken a couple of decades for him to figure it out. I suppose the extended interregnum from the declaration of disrupting B&M retail with mail-order only service to now will be enough for folks to forget that point. Just as the large iPhone was solely a decision by Tim to improve the lives of iPhone users, and not the evident demand for same from users, well... Here, too, Jeff will say that he's invented a new sort of B&M.

Yeah. Right. Sears went from being a mail-order only business to being a B&M outfit. Some people just refuse to learn.