Platform X Network Effect = Real business?

Hey everyone, been a while since I posted (over a year). Think we're going to undergo a little pivot here as I've been getting more and more immersed in current tech trends, I thought I could use this soapbox as a place to express some opinions and thoughts about what I believe is happening.

First and foremost, I want to talk about the current meme that there is a tech bubble emerging. While there is definitely some reasons to be concerned when you hear of VCs outbidding one another on new businesses with nothing but a powerpoint, a lot of the new companies that are emerging have some solid advantages that I believe will position themselves as solid businesses. That said, some of these companies are smoke and mirrors - and we should likewise be concerned.

We're deep into what is known as Web 2.0 or even 2.5 technologies. Companies such as Facebook and Twitter rely on their customers to create content and attract viewers of that content. Facebook and Twitter then monetize the attention that they draw in. These companies benefit greatly from what is known as the Network Effect. The Network Effect applies to anything that becomes more valuable as more people use them. For example, if only one person had a telephone, it would be worthless as it couldn't call anyone. The more people with telephones, the more valuable each individual phone is. Sites with User Generated Content (UGC) are a perfect example of Network Effects, as the more people on these sites, the more valuable they become. Since the Network Effect is stronger with more nodes on the network, companies that benefit from strong Network Effects have a huge competitive advantage over future competitors.

The other thing that a lot of these sites do is act as platforms rather than conventional programs. A platform creates a set of rules, conventions and tools and then allows the UGC to flourish within that platform. Platforms work very well with the Network Effect (although they can each exist independently) because they create a situation where creative usage of the platform spreads across the network. Companies that act as platforms are able to harness the creativity of their users, rather than be threatened by it.

These concepts can seem very basic, but I strongly believe that companies that embrace these two elements are the Microsofts and Googles of the future. The fact that many of these technologies are emergent in the current supposed bubble allays a lot of my concerns.

Explaining Healthcare

So I realize that many (all?) of you are not nearly as big geeks as I am, and, as such, you may have some questions about the Health Insurance Reform bill that President Obama will be signing tomorrow. I'm going to attempt to explain the main elements of the bill here.

Prior to the current recession, over 50% of bankruptcies were caused by health care expenses. Seemingly safe and secure middle class lives were turned upside down - and this could happen to any of us. Insurers had a host of tricks to disqualify coverage from rescission (kicking people off for problems in their original registration - no matter how old), lifetime caps on coverage, annual caps on coverage, not letting people with pre-existing conditions join in the first place. This whole class of reasons I'd term as ethically questionable if the real point of insurance is to ensure that people in need get covered.

The need to fix these problems and other ideological neutral fixes (such as allowing children up to 26 to remain on their parents policies) was the starting point for this legislation. However, it's not enough to just say you can't discriminate against people with pre-existing conditions, because if you did, rates would just rocket. So this bill requires community pricing, among your cohorts you all pay the same.

However, if this was all the bill did, rates would still skyrocket as the cost to insurers is undoubtedly going up to cover those with pre-existing conditions. The only way to make the cost manageable is to bring new people (often healthy) into the system. If you fail to get insurance, then the government will impose a tax on you comparable to the lowest priced health care option. This is the mandate.

However, if you mandate insurance for someone who can't afford it, there's no recourse and it's extremely unfair. To deal with that, they've introduced subsidies. Subsidies will help individuals and small businesses that provide insurance.

These three elements work together, to quote Paul Krugman 'it's a 3-legged stool': Community Pricing, Mandates and Subsidies. That is the topline story.

The other major element that is perhaps the most important is the introduction of exchanges. Currently, if you're a large employer you get courted by insurers and can pick the plan that fits you best. However, if you're an individual or a small business - you're screwed. Rates are high, coverage is limited and the plans are very different from one another - making it very difficult to analyze the plan best for you. Exchanges will change that and introduce market economics into health care. The government will set minimum standards and then the insurers will come in and attempt to offer the best plan. This should hopefully inject a great deal of rationality into our health insurance decisions - something that's sorely needed.

As we dig a little deeper, some issues with this plan emerge. First of all, how can we afford this?

The bulk of this new plan is paid in two halves. The cost of the new plan is pegged at just under $1 trillion over the next 10 years. This is paid almost evenly in taxes on unearned income and cuts to medicare. As we dig into the taxes we find some interesting numbers. Bush rolled back the capital gains rate, this moves it back up about 5% for those making over $200,000. We have an increase in the medicare tax on high earners. We also have a 10% tax on tanning salons (that's why John Boehner was so mad!).


House Minority Leader John Boehner: Does this look like a natural tan to you?

The other tax that's gotten a lot of attention is an excise tax on 'cadillac' insurance plans. Starting in 2018 there will be a new tax assessed on insurance plans that are extremely expensive. The thing to keep in mind, that this is a great way to lower the cost of health care. Since we don't currently pay taxes on employer provided health care, a lot of salary is hidden by using it to pay for insurance. Since the cost is hidden, we end up getting more insurance than we often need driving the cost of everything up. Many 'cadillac plans' have such low deductibles that the patient isn't encouraged to be rational about what care they need. It's all free. Higher deductibles (not high, but higher than they are now) will have a very stabilizing effect on the cost of care.

Additionally, there are about $500 billion in Medicare cuts. The highly ineffective Medicare Advantage (where private insurers provide Medicare instead of the government at a cost of 15% more than it costs the government) will receive cuts. The pharmaceutical industry has lowered some of the rates it charges Medicare. And several other changes I'm not too familiar with.

This is the real simple story. Also contained within the bill is funding to create pilot programs to control costs, funding for community centers, savings from not having the uninsured clogging up and abusing the emergency room system...and much much more.

In Response to L and C Re: Healthcare...

I'm responding to a facebook discussion (on the eve of the Health Reform bill passing) with a couple of friends (at least they were friends until I posted this!)here so that I could really answer their questions, if they'd like to respond I'll post the answers here (I've left their full names off until I get permission from them):

L: you think what is happening right now is good politics? you know as well as I do that these senators are pushing it because they want a big pat on the back from the president. And those rich republicans/dems are paying so much in taxes it is not our fault that the government couldn't allocate a freaking nickle appropriately. It is not a democrat/republican issue it is a socialist vs. capitolist society issue!

C: Quick question .... why does this need to get done before Christmas? Why are we not taking the time to do this right? And people say - oh it is a start. Here is the issue, once money is appropriated they will never cut that spending or give it back. Look at TARP. What is happening now is a joke. How come NATIONAL healthcare is being determined by STATE specific considerations? And dont make the pharma lobby a partisian issue. The Dems and Rebuplicans both take a ton of money from them. Check here. Please note Lieberman, Dodd, and Specter.

For L: Good government is fixing problems that exist! Democrats have run on reforming healthcare since at least 1968 and it has consistently becoming a larger problem in that time. Moreover, we have been discussing the need for universal healthcare all the way back to Teddy Roosevelt. Democrats won with a substantial majority all running for healthcare reform. They’ve tried to pass it before with sizable majorities and failed. I don’t see how this has anything to do with the president’s approval of them. There are over 30 million uninsured Americans, healthcare costs 16% of gdp and medical emergencies caused over 50% of bankruptcies in this country (at least prior to the current recession). This is a real problem that needs solving and the Democrats are committed to solving it.

Moreover, it is well established that the cost saving measures in this bill will mean that WE SAVE MONEY. This is a perfect example of allocating resources properly, saving money in medicare to help pay for needed reforms. It’s nice to say that it’s not Democrat or Republican when the Republicans made a mess of our federal government and then blame Democrats for trying to clean up their mess. Republicans were content to ignore the real problems in our country (such as healthcare) and leave it to the Dems. Instead, they did things like declare unfunded wars, pass new entitlements that were unfunded (medicare advantage) and taxcuts that were unfunded. It’s easy to give away money to the rich when you just increase a deficit. Now that we’re trying to clean it up, they just stand on the sidelines shouting nonsense. Like ‘Socialism’, or (segue):

For C: ‘Why are we not taking the time to do this right?’ What the heck does that even mean? We have been discussing healthcare reform since Teddy Roosevelt. We tried to pass this 16 years ago. The entire presidential campaign discussed this! We’ve been working on it all year! We even slowed it down so that Olympia Snowe could take her damn time deciding not to vote for it! Now, Republican senators are slow walking every single Senate procedure to delay the bill being passed and accuse of rushing it? They voted against funding for the troops just to slow us down! ‘It’s going too fast’ is not a substantive critique when the people who are actually willing to discuss how to make it work are all in agreement. Five years from now will be too fast for the GOP.

The bigger point being that Republicans refuse to even discuss reforms in good faith. When they do that, they force Dems to get every single Democrat vote on board and you need to horse trade to get everyone on board. Then you can pretend that you actually give a damn about how these votes were gotten when you’ve never cared before about how Republicans passed bills. More to the point, do state specific considerations make this bill bad?

I beg you, do not say that the bill is too long or my head might explode!

Understanding What's Going on with Healthcare

This post is going to examine in shallow depth a lot of what's going in with Healthcare reform right now. I feel like the confusion that a lot of people are feeling is making them risk-averse (at least that's my impression among friends and family), so I'd like to take a stab at explaining things.

There are two major issues with healthcare in this country that Washington is attempting to fix. 1) Healthcare costs 16% of every dollar made in America and the cost is growing faster than inflation, which is unsustainable and too expensive already and 2) we're the richest country on the planet and many people in this country can not afford sufficient healthcare. Since the lack of coverage problem appears to be less present to people than the financial issues, it is useful to reformers to note that getting universal coverage will help to reduce the cost of the system.

Healthcare costs are increasing for many reasons. High priced and cutting edge treatments is just one cause. The system is tilted toward doctors spending more money (since they get paid for each test they run, rather than for successful results, quick fixes are discouraged even if they're the better treatment). The insurers take a large percentage for profit. Every service essentially has a tax built in for the uninsured as we need to subsidize the costs of emergency room treatments.

It is known that a large number of people are uninsured. The White House claims it is 46 million people, reform opponents say it is much lower - but that entirely misses the point, I believe. This is the United States, richest country in the world and in all of human history; and we are not the top in the world in providing care for our citizens? The Declaration of Independence does state: "We hold these Truths to be self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness." However, even beyond the general understanding that there is a problem, people always think it's someone else's problem, since most of us do have insurance. However, that's because most people don't realize how easily they could lose their insurance. Whether being fired or changing jobs, we can easily find ourselves without insurance and excluded due to a pre-existing condition.

So how can we solve these issues... There is much saving that could occur if we bring uninsured people into the system. Emergency care is the most expensive type of care, but the only type available to the uninsured. If we get everyone insured, emergency costs will decrease greatly. We can also save money by taking away doctors' incentives to order extra tests. Certain institutions (like the Mayo Clinic) have gotten great results putting doctors on salaries so that they are not rewarded based on the number of tests they order, but instead by healing their patients. However, this is only going to amount to some of the cost (estimated at $100 Billion a year) required to fund the new covered people. We'll need to raise more money from some other sources, possibly 1-3% taxes on earners making over $1 million a year. However, the way the system is currently designed, if we institute reforms the savings will just disappear into the insurers pockets, costing citizens the same amount. That is the purpose of the public option (explained below).

Under the reform plan, all citizens will be required to have insurance. If you can't afford it, then the government will pay for it for you. You can choose any plan that is available for the value of the government subsidy, whether public or private. The public option will be based on Medicare. Medicare guarantees all seniors in this country a minimal level of coverage. If you (or your employer/former employer) can afford more or better coverage you are welcome to it, and many people do. However, if all you can afford is Medicare, then that is usually sufficient. If you can afford insurance and don't have it, the government is proposing penalizing you. The current penalty appears to be half the cost of the public option (likely around $2,000).

One of the most common arguments I hear against government involvement is that this threatens the free market, the driver of all innovation. The first point is, if the free market is more efficient than the government plan, then people will stay with private providers and there won't be an issue. However, if the government is more efficient then that undermines the argument.

And that is the bigger point here. We use the government's size and reliability to do many things in this country where they are more appropriate than private business. Public transit, roads, army, the courts. Just because healthcare has been a non-governmental function in the past, doesn't mean that's appropriate. Moreover, free markets don't really work for healthcare. For one, most people never think of the cost of healthcare, especially those that spend the most on it. People have their workplaces take care of all or part of it and rarely if ever choose employers based on healthcare. Also, humans are very bad at rationally understanding large numbers.* Free markets only work when there is full information available to all. Since citizens can't really conceive of healthcare's value to them until they actually need it, they are not rational actors when they purchase healthcare - making an inefficient market, exploited by healthcare companies.

The bottomline here is that the system is unsustainable as is and we know this. The current proposal will address the need for cost controls, give universal coverage and not alter most people's coverage. Ignore the fearmongering, it's simple and it's needed.

Please comment on this post if you'd like me to clarify or explain anything further.

*I'm currently at home with a knee healing from an ACL reconstruction. My surgery likely cost my insurance company $40,000. What are the odds that you'll tear your knee in the next month? (I have no idea what the answer is, but it's pretty low) Now how much would you pay to insure against that happening?

No More Torture

Yesterday, President Obama released four memos outlining the legal jujitsu and gymnastics the lawyers in President Bush's Office of Legal Counsel came up with to justify turning our CIA agents into torturers. You can see the memos obtained by the ACLU here.

And you all should take a moment to look at them for a second. Lawyers for the President explain how 'extreme pain or suffering', as forbidden by international treaties, does not apply to our techniques because our torture doesn't take too long, or cause permanent physical impairment. So, it's ok for us to throw people into walls, slap people around, put them in stress positions and (yes) waterboard the terrorists.

There's nothing particularly newsworthy here, we've just kept our heads in the sand for so long about what really happened that I'm interested to see if documentary evidence of the depravity that took place will raise peoples' consciousness.

It seems like the consensus in this country is to leave the past in the past. This is bullshit. Just this week, the US agreed to deport a purported Nazi war criminal. Yet, we have no need to look into the mirror at ourselves and our countrymen at the atrocities they committed?

For all of our country's shortcomings at taking the moral high ground, we are different than others, have been different than others, and should remain so. Papering over this incident is despicable. But, I'm spitting a lot of strong words here, so let me explain:

1) We broke international laws and treaties, blatantly. There's no excuse here, the international law is clear, we've attempted to judge others by this standard and reestablish an international community following the Bush debacle. We need to stand up for what we allowed to happen.

2) Torture is ineffective, any experienced interrogator will tell you so. Moreover, these memos lay out the fact that these aren't some Jack Bauer wannabes. The torture outlined here was not about obtaining information. It was about abusing our enemies. Abu Ghraib is a direct consequence of behavior like this, and it blows my mind that most of these memos were issued after Abu Ghraib. How was the lesson not learned?

3) Moving forward is not an option. We will not defeat Islamism without international support, however we have minimal international credibility. Showing that we are addressing our past will bring our allies with us. As proof, as recently as Tuesday, Spain was vocally investigating war crimes charges against some of Bush's lawyers who authorized this. When it became clear that these memos would be released, Spain backed off and let us handle our own business.

4) Ever since Ford pardoned Nixon there has been a complete dereliction by the American public to hold our executive officials to the legal standards they are meant to defend. First Nixon gets pardoned. Then Bush pardoned the Iran Contra operatives. Then Scooter Libby. Meanwhile, anyone with half a brain knows that the Bush administration broke many laws in their singleminded pursuit of the war on terrorism (you can claim that they were worth doing, but you can't deny that they were breaking laws left and right - at least you can't deny it credibly as shown by how outlandish these memos are), yet we are even considering letting everyone off the hook, except the frontline soldiers who got caught?

We need to begin to believe in ourselves again, and we can only do that by addressing our failures and proving ourselves better than it.

John Yoo who is the most well-known of the Bush hacks who authorized torture is today a teacher at Cal Berkeley. Teaching law each and every day. This is outrageous and depressing and shows our nation's failure to confront these criminals and make them pay for their crimes.

I know everyone wants to move and forget the past, no need to stir up confrontations. That's bullshit, our country can never heal unless it addresses its failings and I fear we'll fail ourselves again.

An Open Letter to President Obama

Mr. President (and staffer),

I am a strong supporter of yours. I rented my own buses to Pennsylvania to bring volunteers to your campaign and spent a week working in Pennsylvania.

That said, I believe you need to seriously consider letting Mr. Summers resign. You fought against the corruption of the revolving door in your campaign. Mr. Summers defines that. I understand that he is intelligent and a confidant, but you need someone who is untainted.

I believe that there has been too much focus on preserving the institutions on Wall Street for their own sake, rather for the sake of the economy. This also extends to our behavior with AIG. We don't NEED AIG or Citi, we need them not to collapse and damage those affected. However, there is no implicit need for these companies to exist.

I believe this gets back to people in your administration having preconceived notions of the permanency of the financial system as it is now. It is outsized to our economy and therefore exerts an outsized influence on you and your administration. Having someone with such clear conflicts as Mr. Summers does (as shown in the Washington Post article today), inhibits him from making truly neutral observations. He is not a bad man, but he is compromised.

Furthermore, having these types of figures around you only gives opportunities to those who oppose you. Don't give them the opportunity. I also reject the notion that everyone who is qualified may be compromised. That is a cop out. You're the President, millions would jump at the opportunity to advise you.

I also wanted to note that this is the first time I've emailed you with a complaint since you capitulated on FISA immunity last summer. I am not one to write about every issue of the day, but your own reliance on the people and institutions that brought us this mess concerns me greatly.

I hope you are able to broaden your circle of advisors in light of this conflict and recognize that I am not some partisan attacking but a concerned citizen.

Thank you,

William Finkel

My Thoughts on Tax Situation (late breaking, Daschle withdraws -phew)

I have a few thoughts on the 'tax situation'...

1) Nancy Kileffer - Doesn't this sound like Bernard Kerik? Fess up to a smaller crime and withdraw when no one is paying too much attention? I know it's pure speculation on my part, but her offenses hardly seem worthwhile to withdraw over - so I assume there's something we don't know.

2) Geithner - I understand why one could say his transgressions are more serious than Daschle given his standing as chief enforcer (and overseer) of tax collections. But in his case, I think this actually does show how complicated taxes can be and might help the case for simplification (which I firmly believe could and should be a nonpartisan issue, however, if you think the debate over social security is considered the 3rd rail, wait till they take away deductions for interest on home equity loans).

3) Daschle - This is where I have a problem. I can (kinda) understand that he is given a corporate car and driver and fails to recognize that as income.

However, the problem is that he was accepting a car and driver as a consultant. There is no meaningful distinction here with the forbidden class of 'lobbyist' and he's been involved in this game for years (his wife's been a consultant for decades). Obama's loyal to Daschle as Daschle has been a mentor to him, but exceptions to rules need to be meaningful - and I don't see a reason why Daschle NEEDS to be the pick for HHS. Is he the only one who can get health care reform passed?

With the person given the waiver in DOD, I can understand saying that he is the ONLY man for the job - Daschle is not the only man for the job and he is tainted by the revolving door. Barack doesn't need him, but apparently his talk of cleaning up DC ends when his friends are the topic. I'm embarrassed. (and now I'm relieved he's gone...)