Saturday, November 24, 2012

Do you have a moment to talk about Gay Rights?

While giving my gay friend a tour of ASU, we were stopped by a guy who asked us if we had a moment to talk about gay rights. He explained that Arizona is one of 29 or so states in which it is illegal to fire someone for being gay. Sounds pretty messed up, right? This one's a no-brainer, right?

After talking with the guy, I thought for a minute about what might be the consequences of a law making it illegal to fire someone for being gay. Whenever I think about these issues, I first like to ask: what is the status quo? Do we live in a country where companies make it a policy to fire people for being gay? What currently happens to companies that have an overtly anti-homosexual policy? I believe the honest answer is that Chick-fil-a is the exception and not the rule, and that the vast majority of businesses know that bigotry is not profitable in the 21st century. So given that the problem of companies firing people for being gay is relatively small, the benefit of passing a law making that illegal would likely be small, too.

But what about unintended consequences? Employers like to be able to fire people at their own discretion. They want to be able to fire people for being abrasive, annoying to work with, dumb, whatever. When you make it illegal to fire someone because they are gay (or a minority or a woman or whatever), in effect you make it difficult to fire that person for any other reason. Unless you have carefully documented reasons for terminating the employee, you risk getting sued for discrimination. Despite its good intentions, the likely unintended consequence of such a law would be to make employers less willing to hire someone they know is gay simply because it will be more risky to fire them later.

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Wednesday, November 21, 2012

Go Musicals is thankful for...

Go Musicals is thankful for all the wonderful support we have received from teachers and students, friends and family.

Go Musicals is thankful for the brave directors willing to take a chance on a new musical.

Go Musicals is thankful for the young actors and actresses who share their light on stage.

Go Musicals is thankful for the incredible talents of the growing Go Musicals team.

Go Musicals is thankful for the opportunity to do something special.

To everyone reading this: THANK YOU FROM GO MUSICALS!

(I meant to publish this on my Go Musicals blog, but since I already posted it here by accident I suppose it'll do for my personal blog, too!)

Monday, November 19, 2012

Dear Entrepreneur

Everything will take longer and cost more than even your worst-case projections.
"Simple" engineering or coding challenges will turn into nightmares. People you contract will let you down, jerk you around, fail to deliver on schedule. There will be cost-overruns. You will not stay on budget. You will not stay on schedule.

Nothing will work as expected. 
Your marketing efforts will fail. You will say things like "even if I only get a 1% response rate" and then you will get zero responses. Your website won't work right on some browsers and you won't know why. People won't show up to your event. The printer will screw up your order. Systems will crash at the worst possible moment. People won't buy tickets. People won't sign up. A vendor will send you the wrong product and it will be too late to fix it. People will be nonplussed by your beautiful graphic designs. You will bind yourself in partnerships and then your partner will not deliver. You will give the perfect pitch to the ideal customer, and they will ignore you.

You will blitz too early.
You will launch your website before it is ready. You will blow your budget on marketing before you are ready to handle sales or have properly tested out your product or service. You will make a bad first impression on all the people who are easiest to access, and those people will not give you a second chance. They may be your friends, but they will not visit your website again. Fortunately...

Your blitz will be a spectacular failure.
Most people won't visit your website or look at your product or go to your store anyway. I'm not saying they won't buy your product. I'm saying they won't even look at it. Not even your friends. So don't beat yourself up for blitzing too early, because nobody paid attention anyway.

You will be taken down a peg or ten.
You told everyone what you were doing. You told everyone what you would achieve. You were confident. You brushed off the advice of others, because you knew better than they. You knew why others had failed, and you would not repeat their mistakes. Then you failed once. Then again. Then again and again. No one attended your event. No one is visiting your website. No one is buying. You are hemorrhaging money. Things aren't working, and you can't make sense of why. You will have to eat your words. You will be embarrassed. You will learn to respect other entrepreneurs, because now you understand what they have been through. You will learn humility.

Failure will become a friend.
You will discover that you learn more from your failures than from your successes. You will learn to listen to the experiences of others - especially the experiences of other entrepreneurs. Each failure will leave a scar on your ego, and you will begin to cherish your scars. You will learn to give careful consideration to all advice you receive, even really bad advice from people who have no idea what they are talking about. You will learn to hedge your bets and to experiment cautiously. You will learn to expect most efforts to fail, and therefore to moderate both your spending and your bravado.

It might take years, or even forever.
For a long time you may see no sign of growth. You will not know when or even if your venture will ever become viable. Remember that multi-million dollar startups, funded by the most successful business people in the world, frequently fail to ever take off. Failure happens more often than not. But failure is not defeat. You will have many failures, but only you can decide when it is time to accept defeat. That uncertainty will become even more stressful than it sounds.

You will work your ass off.
Most people will have no idea how much you're working. They will have no idea how unexpectedly complicated and risky everything turns out to be. Unless someone has started a business, they cannot know. You will have to learn a million different things, and you will get no credit for it. Your job will never leave you; you will work day and night. The weight of the world will be on your shoulders. You will take horrifying risks. You will calculate your hourly wage and discover that you could be making more money digging ditches in Uganda. You will lose your savings and years of your life. Yet your friends will consider you unemployed and expect you to drive them to the airport whenever they need it.

You will learn to seek advice.
The same advice you used to brush off, you will now seek out. You will want to hear as many perspectives and as many case studies as you possibly can. You will take people to lunch and listen to them. You will learn the phrase: "Will you please help me?" You will learn to show your gratitude to people for sharing their input, even if they clearly have no idea what they are talking about. You will learn that it's not about finding other people to tell you what to do, but rather it's about finding new insights to help you make better decisions.

Some people will get lucky, but you will not.
Some people will have a much easier time with their venture than you will. Some people will make the right contact, find the right niche, get re-tweeted by the right celebrity, and they will be an overnight success. This will not happen to you.

People will look down on you.
When they see you struggling, they will blame you. You should have listened to them. You're doing this or that wrong. It was a bad idea to begin with. They always knew it wouldn't work. You should have gotten a real job. It's time for you to grow up.

Your friends will not support you.
Your friends are not your fans. You must resist the impulse to resent your friends when you realize that they do not care at all about what you are doing. You can't build a business on friends, anyway. You need fans. Fans love your product or service for what it is, not because they are your friends. Expect your friends to let you down. Expect them not to listen to your album or read your book or watch your video or try out your product or eat your food or play your game. This will be a tough one to deal with, but try not to hold it against your friends.

Your fans will sustain you.
You need a fan. You need someone to love your work and believe in what you are doing. This might be your partner, or it might a customer. You will have low moments, moments of self-doubt, moments in Gethsemane. At times like that, you need fans, not friends. You need people who truly believe in what you are doing when even you do not.

Make art.
The way to gain fans is to make art. Do work that satisfies yourself. Give customer service you are proud of. Make food so good that it literally excites you to watch others taste it for the first time. Design a logo so beautiful you find yourself staring at it for minutes at a time on your computer screen. Do work that you believe in, then put it out there where others can find it. Don't expect the whole world to fall at your feet, but with a little luck you will get a slow trickle. Cherish your fans, because they are few and precious.

Kevin Frei
CEO of The Company Player, a theatre-based corporate team-building program (defunct)
Partner in SAMI, a bio-tech venture (defunct)
Author of three unpublished novels written roughly at ages 12, 16, and 21 (defunct)
CEO of an independent film production company that failed to raise funding (on hiatus)
Independent game developer (defunct)
CEO of Go Musicals (growing... slowly)

Tuesday, November 13, 2012

The Entrepreneur Bug

I'm feeling entrepreneurial.

I've been marching to the beat of my own drum for most of my life. Financially it has been a disaster, but I've certainly had some incredible experiences.

I'm ready for a new challenge. Building Go Musicals has taught me more about starting a business than I could ever learn in school. Now I'm anxious to take those skills and apply them to a new venture.

Sunday, November 11, 2012

Drake Equation / Cosmic Super-Download

That we are not alone in the universe is a statistical given. The odds that we will ever hear from an alien civilization are formalized in the Drake Equation:

N = R^{\ast} \cdot f_p \cdot n_e \cdot f_{\ell} \cdot f_i \cdot f_c \cdot L
N = the number of civilizations in our galaxy with which communication might be possible (i.e. which are on our current past light cone);
R* = the average rate of star formation per year in our galaxy
fp = the fraction of those stars that have planets
ne = the average number of planets that can potentially support life per star that has planets
f = the fraction of the above that actually go on to develop life at some point
fi = the fraction of the above that actually go on to develop intelligent life
fc = the fraction of civilizations that develop a technology that releases detectable signs of their existence into space
L = the length of time for which such civilizations release detectable signals into space[5]

With new "super-Earth" discoveries becoming a regular occurrence due to new detection technologies, it's worth thinking about the implications of a relatively high value for fp, which now seems to be the case. Are the odds looking particularly good that we will detect an alien signal within the near not-too-distant future?

Luckily for us, the dedicated nerds at SETI (Search for Extra-Terrestrial Intelligence) have been busy scanning the sky for decades. The fact that they haven't found anything yet shouldn't discourage us - they can only "listen" to small patches of the sky at a time. Within our lifetime, as technology improves, we should be able to determine fairly conclusively whether any alien signals are reaching Earth.

If we do hear something, it'll probably be from a very long time ago. It will be a look into the past, not an opening for a dialog. Maybe it'll just be some alien TV signal. Or maybe it will be a message.

So here's the part that blows my mind: what if the message contains the instructions for the next thousand years of science and technology? Nuclear fusion, artificial intelligence, the Grand Unified Theory? What if it's like in the movie Contact, and we get some kind of cosmic super-download that changes everything?

Though it may seem like a ridiculous notion, it may not be so implausible. It's looking more and more like our galaxy is chock-full of planets.

Saturday, November 10, 2012

#JoeStiglitz Endorses This

Nobel Prize winning Economist Joe Stiglitz tweeted this video:

But I just don't get it. People keep saying that the US can't default on its debt because our debt is denominated in currency we control. So? Was default ever the issue? Inflation expectations are the problem. Maybe I'm just not understanding it correctly, but all this "zero percent of default" stuff seems really misleading to me. If it becomes clear to markets that the US will inevitably have to debase the dollar in order to make good on its bonds, then why would markets be willing to pay the same price for those bonds if they expect a lower real return? Ultimately, doesn't all spending have to be paid for through taxes, whether now or in the future? If bond markets lose faith that we will be able to pay for the debt without raising inflation, then our ability to borrow will be compromised; and if we can't borrow to finance the size of government we want, we will have to either raise taxes or cut spending in order to be solvent. I get that we will never default on our debt obligations, but servicing the debt is only one part of government spending. We can't pay for Medicare and the military and everything else just by printing more money. Therefore if we lose our ability to borrow, and if tax revenues are not sufficient to pay for our desired level of government services, what choice will we have but to raise taxes or cut spending? This guy seems slippery and deceitful to me:

Thursday, November 8, 2012

The Basics

Speaking with a friend of mine who grew up in a communist country, it occurred to me that most people (even those educated here) have not been taught the basic dynamics of how an economy works. So I think it's worth walking through some of the main ideas. The key economic terms are in bold.

John is fast at making bread, but he is slow at making wine. Jane is fast at making wine, but she is slow at making bread. Each has a comparative advantage.

John values his second loaf of bread less than a bottle of wine. Jane values her second bottle of wine less than a loaf of bread. Through division of labor, each can do what they do best and then they can induce each other into making a trade at the end of the day. Because John values Jane's bottle of wine more than he values his second loaf of bread, and because Jane values John's loaf of bread more than she values her second bottle of wine, each ends up with something they value more than what they had originally. They played a positive sum game because the transaction resulted in a higher sum value than when they started. Because both parties benefited and no parties lost out, we call this a Pareto improvement or win-win.

So, John values the bottle of wine more than his second loaf of bread. The difference in value to him is called "profit" if we think of John as the seller, or it is called "consumer surplus" if we think of John as the buyer. It's the same thing.

Now, suppose Jane breaks the rules and makes John give her a loaf of bread against his will. Jane values the bread less than John values it, but she takes it anyway. This coercive act is negative sum because the bread in Jane's hands has a lower value than it had in John's hands. Fortunately for John, the government is there to punish coercive acts of aggression and he may get his bread back after all. But first he has to hire a lawyer. Unfortunately, the lawyer has plenty of bread and doesn't need any more. But the lawyer does like money.

What does John do? Well, he can take his bread to a market place where it will be converted into a common currency, aka money. John makes a profit from the conversion because once again he was able to engage in a positive sum game with a buyer who was willing to pay John more for the bread than it cost John to make. Now John is able to take that money to the lawyer and trade it for the legal representation that will help him get his bread back from Jane.

Now that John is free from piracy because Jane is in jail, John begins to ramp up production of bread. He finds that as he makes more and more bread, the marginal cost per unit of each loaf gets cheaper and cheaper because he is able to buy wheat in bulk and develop efficient bread-making processes. In other words, he is using economies of scale to make bread more cheaply. That means when he goes to the market to play positive sum games with buyers, his profit margin is larger because each loaf of bread costs him less to make. Notice that even though his profit has increased, it has not diminished the consumer surplus that the customer gets from the transaction. John's gain comes not at the customer's expense, but due to his own improved efficiency.

John soon realizes that if he lowers the price of his bread, he can induce more people to buy it. Even at a lower profit margin, he can increase his net profit. However, if he lowers it too much then his net profits will decrease because the added customers won't make up for the lower profit margin. John needs to determine the optimal price that maximizes profits. As an added benefit, those customers who were willing to pay the higher price now find their consumer surplus increased because the cost of the bread has gone down.

But one day John wakes up with an evil gleam in his eye. He finds a do-gooder who believes that eating more bread is essential to a healthy diet, and he finds a politician who wants the support of the do-gooder in order to get elected, and he proposes a coalition. John is much smarter than the do-gooder and the politician, and he tells them that if only there were a law making everyone eat bread then everyone would be healthier. So John, who is wealthy from his bread business, finances the politician's campaign on the do-gooder's platform of promoting bread through laws requiring everyone to buy bread. Pretty soon the politician is elected and the bread law goes into effect. Now everyone has to buy John's bread, and he no longer needs to induce them by offering them a consumer surplus. So John exercises his monopoly power and raises prices.

But wait! Now that John has raised his prices so high, other entrepreneurs realize that they can make a profit by undercutting John's price. So now there are three bread-makers competing for the same customers, and these competitive forces force John to lower his prices in order to retain customers. But unfortunately for all the bread-makers, their bread is identical. None has a comparative advantage over the other, so they must resort to constantly undercutting each other's prices and a full-fledged price war ensues, driving the profit margins down close to zero. John knows he cannot stay in business with zero profits. He must find a way to gain a comparative advantage over his competitors. He tries going to the politician to gain an advantage through regulation, but the politician has been replaced with a libertarian who doesn't play those games. (wink!) He considers talking to his competitors so they can form a cartel and engage in price-fixing, but with that libertarian in office he knows he will get sent to jail for engaging in illegal anti-competitive activities like cartelization. John decides he needs to find a way to increase his profit margin by improving his efficiency once again. By hiring an employee, John decides, he can increase his production of bread further still and lower the marginal cost per unit. So John hires the best employee he can find.

Now that John has the best employee, efficiency is improved and the marginal cost per loaf of bread decreases, allowing John to have a larger profit margin and higher net profits overall. But this comparative advantage is short-lived, because before long his competitors start trying to steal his employee. They offer his employee higher wages than John is paying in order to induce him to go work for them. John could replace his employee, but the replacement would be less skilled and therefore less productive, yielding a lower return on investment. John calculates the monetary value of his employee to the business, which is the total amount of profit that results from the employee's productivity. Then John subtracts the employee's wages from that value. The difference between what John pays the employee and what the employee is worth to the company is the surplus. In order to retain the employee, John must give up some of that surplus and pay the employee a higher wage. But there is an upper-bound to how much John will pay his employee: he will not pay the employee a wage that is higher than the employee's value to the company. Without some surplus from the employee's work, John has no reason to keep him. The employee can raise this upper bound only by increasing his own productivity, and thus his total value to the company.

Because his competitors have started a bidding war for his employee, this upward pressure on wages has once again eaten into John's profits. He must find a new comparative advantage.

So John begins to build up the brand of his bread. He improves his relationships with vendors. He builds consumer trust and confidence. He experiments with different kinds of bread to attract new customers. He develops special recipes that are trade secrets, his intellectual property, that his competitors can't copy. All of these things are comparative advantages that allow John to charge a premium for his product and maintain a healthy profit margin. All of these advantages only work because they provide greater consumer surplus to customers and induce them into positive sum games. But due to competition, none of these advantages last long; John must continue to innovate in order to for his company to survive.

The final part of this story comes when the employees at the different bread-making plants begin to unionize. The employees decide to form groups that allow them to negotiate for better working conditions. The employees, too, face competitive pressures from other workers with comparative advantages trying to win their jobs. So what started as a measure to improve working conditions becomes an effort to increase job security. Unfortunately, if they demand too much they will face competition from other unions, so the unions begin to lobby politicians. The libertarian politician is gone now and replaced with someone else. That politician begins to pass laws that disrupt the natural marketplace, promoting cartelization and monopolization among unions. The same behavior that is deemed toxic among competing companies is enshrined in the law for unions. With the power of monopoly, the union does exactly what John did when he had a monopoly - it begins to drive up prices, forcing the bread-makers to raise their prices on consumers in order to maintain a profit margin.

When bread-makers in a nearby country hear that the employees are unionizing in the United States, they ramp up production, knowing that the American bread-makers will never be able to compete now that they are paying inflated wages. The market gets flooded with foreign bread, and the American bread-makers are forced to slash prices below profitability in order to compete. Pretty soon, the American bread-makers are bankrupt. They go out of business and all the workers are laid off. The end!

A couple observations: Notice that everything everybody did in that story was entirely self-serving, yet in every positive sum game there were at least two beneficiaries. This is that invisible hand that Adam Smith wrote about. Also notice that whenever possible, the individuals first tried to do something coercive. Jane stole from John. John lobbied for a bread law to force people to buy bread. John considered forming a bread cartel with his competitors to force customers to pay more. The workers lobbied the government so that their unions could attain monopoly power and coerce the bread companies to pay them more. Notice also that in the case of Jane stealing John's bread, the government is the solution because it punished coercion. Notice also that in the cases of monopolization and regulation, the government was the problem, either sanctioning coercion or doing it itself. Libertarians advocate for a government that prohibits private coercion while avoiding public coercion. That's what all this "limited government" stuff is about.

That went on a lot longer than I planned. And I just realized I didn't mention supply and demand once lol.

Tuesday, November 6, 2012

The Libertarian in Me

The libertarian in me is thrilled that a Democrat is in office to champion civil liberties, but the libertarian in me is sad that a Democrat is in office to spend money. But the libertarian in me doesn't think the Democrat in office will really accomplish much for civil liberties, and the libertarian in me doesn't think the Republican would have spent much less money if he had won. All in all, the libertarian in me is damn glad to be living in America instead of just about anywhere else on Earth. Except maybe Switzerland. If I could be living in Switzerland I'd tell the libertarian in me to f*** off!

Voting for What's-His-Name

Today I'm casting my ballot for what's-his-name, the Libertarian candidate. Evidently if he gets 5% of the votes then the Libertarian Party will get to participate in the debates next year. Since I think the Libertarians get most of the big issues right, that's how I'm I'm going to vote. For what's-his-face. Off the the polling place I go!

Saturday, November 3, 2012

Glass Half Empty / Taking Inventory

I'm having a glass-half-empty day. I need to figure some things out. Time to take inventory.

The world is full of things worth celebrating, worshiping, and adoring. I love the final fantasy music coming out of my roommate's room. I love this laptop I got for a steal on craigslist. I love the light coming in through the window. I love the little grumble of the icemaker in the fridge. I love the way this table feels cool on my elbow. i love how good it feels to scratch my mosquito bite. I love that my grandma is celebrating 95 years of life today. I love that today in New York millions of people are facing the daunting but wonderful project of rebirth. I love that Trey Parker is funny. I love that leaves are green, that they drink sunlight, and that they wiggle in the breeze. I love that three thousand years ago people stacked bricks to make giant tombs that survive today. I love that there's not a country in the world where someone isn't falling in love with someone else right now.

Friday, November 2, 2012

The Misleading CRS Report

Two friends have now emailed me articles about how Republicans suppressed a "non-partisan tax report" that refutes some key conservative economic ideas. The report in question is from the Congressional Research Service and examines the effects of marginal rates in growth and inequality.

The report was actually brought up in a great Facebook debate I had a week or two ago, so I had already looked at it. I have a lot of problems with it.

So what's wrong with the report? For one thing, the report does things like this: On page 2 we read, "Although the statutory top marginal tax rate was over 90% in the 1950s, the average tax rate for the very rich was much lower." Then on page 9 it says, "The top marginal tax rate in the 1950s was over 90%, and the real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s." If the real tax rates was "much lower" (it says 60% on average), then why still throw around the misleading 90% figure?

Looking at Figure 3, we see exactly what we would predict: as the marginal rate rises, savings go up. As the marginal rate lowers, investment goes up. The report says the data is too "statistically insignificant" to prove causation. That's true, but it certainly corroborates causation.

The report says that there is "no conclusive evidence... to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth." Ok, I agree that tax rates have not been the dominant factor in the world economy for the past 65 years. "However," it goes on, "the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution."

Here's how I look at this. Do marginal tax rates affect the distribution of the pie? Absolutely. Do they affect the size of the pie? Absolutely. Do they affect the distribution of the pie more than the size of the pie? The report would like to suggest that is the case, but it does so just by plotting data points from the past 65 years against the marginal tax rate, as if that were the only thing going on over that time. I think it is silly to look at these 65 year trends as if the other variables were controlled. A shift away from unions and blue collar industries due to competition abroad has undoubtedly been a much bigger factor than tax rates when it comes to income distribution. And with regards to growth, one thing to consider is that marginal rates have not fallen nearly as far as is suggested when we throw around the misleading 90% figure. Another thing is that of course GDP growth hasn't been commensurate to the decrease in marginal rates over 65 years. What a crazy suggestion, as if post WWII growth rates could have increased for 65 years in a world that was catching up!

So how do we measure a policy's positive effects over 65 years if we can't isolate it from other factors that had negative effects? That's the problem with taking such broad data and using it to shape a narrative. It's not very useful or instructive, and it strongly implies things that aren't necessarily true. I think people are right to criticize this report.

Thursday, November 1, 2012

Night of the Living Dead: the Musical

Introducing my latest musical! When dead celebrities rise from the grave with a hunger for human flesh, a musical writing team, an executive, a lawyer, and two young lovebirds take refuge in an abandoned country house. They soon discover that pop star zombies are the least of their worries as they uncover a conspiracy by an ancient organization bent on taking over the world. Zombies, Karate Rangers, lawsuits, pan-dimensional beings, and supernatural forces of good and evil clash in this loose musical adaptation of the classic George Romero zombie film.

This Sh*t Is Bananas!

Went out to karaoke with my buddies Kelvin and Brian tonight dressed as a banana for Halloween. Some idiot yelled "queer" at my friend (who is gay) when he was singing "Try a Little Tenderness," and some girl at the bar threatened to kick the guy's ass. Happy Halloween!