Here’s a video just released by the Kauffman Foundation covering their economic bloggers conference from earlier this year.  While I am one of the people in this video, I think it takes a very good look at the emerging role of economic bloggers in both the media and our culture.  It’s also a delight to see such high production values, though I sure need a haircut.

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Readers have lately been asking me to write about IBM.  It seems the BBC has been on the case somewhat over imposed changes to Big Blue’s UK pension scheme.  These mirror similar — though more draconian — changes imposed on IBM’s U.S. workers a couple years ago.  Alas, this just seems to be a trend we’ll be seeing more and more of.  The problem isn’t in IBM per se, it’s in the distorted reward structure perceived by most public companies.

Two years ago when I covered IBM’s yet-to-be-announced layoffs in some detail it sent the company into a tizzy of denial.  Why?  “Because you were right,” said a source who still works at IBM.  “You called them on the big changes they were planning to make, forcing the company to issue denials then drag those changes out over a couple years where they’d intended to impose them all at once. They never thought one blogger could have that much impact.”

Explain that to my kids, who think I type for a living.

What happened two years ago was IBM deciding to move most of its jobs offshore to save money after a sobering look at the life cycle cost of its U.S, workers. If you look at the total future cost of an American employee for the next 15 years — it is a pretty big number.  Then add the double digit inflation cost of U.S. health care and that number becomes bigger still.  The only way companies like IBM see themselves being able to continue to operate is by cutting retirement benefits and/or shipping jobs off shore.  In IBM’s case they are doing both.

This is at the heart of the current health care debate, because the cost of medical care is killing U.S. jobs.

The IBM USA pension plan was nuked a couple years ago.  Many U.S. workers got less than 15 cents on the dollar for the present value of the pension they would have received.  Retirement health care benefits for IBM workers are now down to the equivalent of about 18 months of present coverage. This trend is not limited to IBM.  How many auto workers have just lost pension and retirement benefits?

A few years ago Congress was considering legislation that would separate pensions from companies so the company could not spend or lose it.  We sure blew that one.

This downward trend is continuing. IBM — like nearly all its competitors — is shipping-in workers from India to staff many new projects.  The work could be done as well — perhaps better — by the U.S. workers who were not long ago laid-off.  There is something really wrong when a company will lay off its U.S. workers and then import Indian workers to do the same work on-shore.

Now some of IBM’s American workers are being asked to consider taking jobs in Bangalore and other foreign outposts. This program creates new expatriots, giving each a one-way plane ticket.  Pay will be in local currency, possibly at local pay scales.  IBM is being very elusive about these details.  But it is clear that the transported workers will be off U.S. benefits.

But as I say, IBM is merely one example of how messed up things have become for U.S. companies.

During the recession IBM has done extremely well financially with profits better than forecast every quarter. They did this by relentlessly watching their money.  Not only do they look at the numbers for the next quarter, but for the next several years.

The automotive industry on the other hand has ignored the long term in their business planning.  As a result most car companies were completely blindsided by the recession.

IBM has watched the growing costs of maintaining its U.S. work force.  For years they have been cutting staff and moving work offshore.  The U.S. auto industry on the other hand was dependent on future car sales to cover obligations made in the past. IBM planned ahead and started shifting the business out of the U.S.  Other firms did nothing and have suffered horribly.

What this means is that we should expect more of the same in all industries. Benefits will decrease and jobs will depart.

The new reality at IBM is that if you’re brilliant, work really hard, and earn a world-class degree from a U.S. university, IBM may well have a job for you at one of its U.S. research sites working as a “complementary worker.” But don’t expect that job to last for long. Be prepared to ship out to India or China as a “long-term supplemental worker” after you’ve soaked up knowledge for 13 months.

Newsweek recently reported that IBM, HP, Accenture, and others are finding it profitable to detach from the United States (even patenting the process).

“IBM is one of the multinationals that propelled America to the apex of its power, and it is now emblematic of the process of creative destruction pushing America to a new, less dominant, and less comfortable position,” Newsweek said.

This is the HR equivalent of a neutron bomb, which kills people but leaves structures unscathed. So all these companies will be leaner and meaner — mean enough that there may be nobody left to buy their products.

It comes back to the common perception that the sole function of public companies and their CEOs is to “maximize shareholder value” — a phrase that is interpreted to mean “maximize next quarter’s earnings-per-share.” This philosophy works beautifully with the slightly less than four year average tenure of a U.S. public company CEO.  Long before the effects of these bad decisions can show the CEO has bailed, descending beneath his golden parachute toward some retirement heaven.

Where did this cult of shareholder value maximization come from?  And who says that’s the prime directive and nothing else ought to matter?  Not me. In fact it is bad policy both for the companies and for our society in general.  Here’s a good explanation of this phenomenon and what’s wrong with it.

Companies like IBM that take this position are hurting America.  The kids graduating from college now are the first American generation that is likely to do less well financially than their parents.  My kids will do less well than me.  One reason for this is that we’re eliminating high paying jobs and replacing them with lower-paying service jobs.  IBM towns like Rochester, Minnesota and Armonk, New York thrived economically because Big Blue pumped money into the local economy by creating high-paying tech jobs.  What happens to the local economy when those jobs are exported? It declines, perhaps permanently. That decline does not have to be inevitable unless we make it so.

Companies and countries follow certain life cycles, but we do ourselves and our culture a disservice by thinking those curves aren’t affected by the corporate decisions we make.

If we’re going to be analytical, let’s at least do it correctly.

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This column started out being titled “Is Goldman Sachs Evil?” until I realized the issue is far more broad.  It began with a blog post by my old boss Jim Casella, who now runs Asset International, a financial publisher.  Jim concludes after a review of some recent and very negative press that Goldman isn’t evil, per se, just cocky.  But by comparing the investment bank to sports teams and players I think Jim makes a grave error.  Goldman Sachs isn’t evil, just stupid.  And that stupidity comes in the form of their witless abuse of technology.

Jim’s sports analogies are misplaced because while sporting events must inevitably have winners and losers economies don’t. TRADING has winners and losers but Goldman is an INVESTMENT bank (worse still, they are now a bank holding company) pretending to be on the side of economic growth.  Trading relies on finding and exploiting inefficiencies in the system while investing grows the economy.  Trading is a parasite on investing.  I’m not saying to ban it, I AM saying that technology has enabled outfits like Goldman to be such efficient parasites that they threaten the survival of their hosts.

This is fine if we look at it as a process of evolution.  Maybe what we are going through lately is natural selection that will over time improve our culture and society.  But that’s not the way it is being pursued by Goldman and others: they aren’t envisioning some future after they’ve killed their host, nor do their techniques allow the host to recover before being bitten again.  I’ve talked with these guys and they are clueless about the implications of their work. The deepest they’ll go is to allow that China will likely be the next economic superpower so they’ll just move their operations to Beijing or Shanghai.

That doesn’t do much for Ma and Pa back on the farm.

Economies need a little slack to function smoothly but these companies are removing all of it. All they need to be is a little less greedy, but their greed apparently knows no bounds.

Their techniques usually come down to the application of technology.  Faster computers and bigger pipes allow the relentless application of small advantages that eventually suck profit out of the market.  The answer is bigger and bigger guns wielded by bigger and bigger players, which is fine unless you aren’t a big player, which pretty much describes the rest of us.

This process builds financial bubbles until they pop then it is left to the despised government to fix things.  But what if government runs out of options?  Then there is economic revolution.  That’s what happened in the former Soviet Union in 1989 — a process we in the west cheered at the time.

But what if it happened to us?

We can’t imagine that.  Our economic policy doesn’t imagine it, nor does our foreign policy, because superpowers don’t acknowledge weakness.

But we ARE weak.

It all comes back to technology.  Remember the work of Black and Scholes that underlay the staggering growth of derivative securities was based on thermodynamics. We use principles from one area in another to good effect, but what makes an efficient heat exchanger can make a deadly security.

There’s a sore failing here, I believe, in the application of ethics to technology.

Ethics?  What does ethics have to do with Boyle’s Law?

Maybe nothing, maybe plenty, but the overall problem is that those who claim to understand ethics aren’t so good at the technology parts, and vice versa.  We saw that with Enron, which was technology gaming the market, and we evidently haven’t learned much since.

Google’s corporate motto is “Don’t be Evil.” I thought that was silly when I heard it first.  But now I think it is the height of wisdom.  Because the techiest of techie companies probably knows better than most the power of tweaking systems to death.

It’s possible.  We CAN kill our own culture trying to preserve or defend it.  Understanding that and helping to make change as painless as possible comes down to the best efforts of those few people who really understand the complexity of our society — many of whom are readers of this column.

Everything is interconnected in this era where technology drives society yet few really understand technology.  If someone can take down Twitter because of a petty grudge then ANY information system is vulnerable.  Sometime neglect is all it takes.

And neglect is all around us.

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A couple weeks ago you may recall a column I wrote about how Orbitz, the Internet travel service, lost all my personal data including my on-file credit cards.  Well most of this lost information is now back and I want to update the story.

I’m a long-time Orbitz user with enough frequent flier miles that they ought to care about keeping me happy.  And it turns out a number of Orbitz employees are also my readers, so that helps, too.  After that column appeared the company put some real effort into figuring out what had gone wrong and trying to fix it.

What happened, it turns out, is that I had tried to book a flight without first logging-in to my account.  The way the system works Orbitz would very much prefer if you sign-in first, but if you don’t they don’t require a sign-in, though in retrospect I wish they did.  Forcing me to sign-in would have saved a lot of trouble.

If you try to book without first signing-in, Orbitz will let you go ahead, but wisely won’t allow you to use any credit card data that’s already in the system.  This is intended to keep someone with a little bit of knowledge from using my credit to pay for his or her spring break.

This all makes sense but the way the credit card data is held in encrypted form the only way Orbitz can get rid of it is by GETTING RID OF IT — nuking forever the payment data held in their system for, in my case, maybe 10 years.  It’s gone and they can’t get it back.

I’m not so bothered by this because I now use only a debit card (living in the real world) so there was only one card number to replace, which I had to do personally.

But remember that I lost other information from the system, too, like my seating preferences (window) and frequent flier numbers with four airlines.  Losing THAT data was a bug according to Orbitz.  It shouldn’t have happened.  They are working on it.

So I started the dominoes dropping by trying to make a reservation in a hurry, but among the repercussions of my actions was a real bug that has probably affected other people, too.

My preferences and numbers are all now restored (by Orbitz) though I now seem to prefer aisles.

Things are almost back to normal in my travel world.

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I live in Charleston, South Carolina, which is a regional health care center with a local medical school and a lot of doctors, some of them my neighbors. So I hear a lot of doctors bitching about their professional lives.  And that bitching generally comes down to a single argument: “I’m bringing home less money than I used to: if this medical system is so out of control, why isn’t my income out of control, too?”

One of my doctor neighbors who does a lot of surgery spends $70,000 per year on medical malpractice insurance premiums.  I asked him if an extra $70,000 per year in income would stop his complaining.  He said it would.

So let’s save him the money.  The legal and financial costs of medical malpractice in the U.S. amounted to about $17 billion in 2005.  That isn’t much compared to the almost $2 trillion total cost of healthcare, but divided among the nation’s 700,000 physicians it’s over $20,000 per head.

Ultimately we patients pay the cost of malpractice anyway through medical fees and insurance premiums, which amount to around $50 per patient per year.  Why not handle it, then, the same way we do uninsured motorists on our car insurance policies?  Throw on an extra $30-per-year fee (we’re cutting out the lawyers, remember? so the amount can be less than $50) to handle medical malpractice.

If your surgeon comes to work drunk and takes your wrong kidney, you don’t sue him, you file a claim with YOUR insurance company.  Claims get a medical vetting but awards follow standard actuarial algorithms, which ought to both mean that true costs are covered AND the insurance company makes a small profit on your pain, keeping the system stable.

Lawyers in this system would limited to going after doctors for professional sanctions and non-monetary penalties like having their medical licenses revoked.  As my old dean told me, “When there is no money people fight over turf.” So in a disconnected malpractice system the professional penalties are likely to get more stern, not less.

This is not intended to let the bad docs get away with malpractice, because they’d be quickly blackballed by health insurance companies refusing to do business with physicians who cost them extra money

Politicians like to talk about tort reform, which comes down to limiting lawsuits and victims going uncompensated.  It doesn’t have to work that way.  Let’s just change the game to one where bad doctors — not all doctors — are punished.

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This morning Google announced it was spending $106 million in stock to buy On2, a maker of audio and video compression software.  The very logical question I don’t hear being asked, though, is why would Google spend money for something it is already getting pretty much for free?  It’s to turn yet another partner into a competitor, this time Adobe Systems.

Google already uses On2 codecs in Adobe’s Flash video, which is the very heart of its YouTube video streaming service.  On2 powers YouTube’s so-called High Quality or HQ service, which due to competitive pressures on YouTube is likely to soon become YouTube’s standard codec.

It is important to remember that Flash video was not a significant competitor until it was embraced by the pre-Google YouTube.  Flash video simply wasn’t that good.  It relied on an antiquated H.263 codec that was originally intended for video conferencing and, while fast, was of not particularly good quality.  But quality didn’t matter to the early YouTube, just fast and reliable streaming connections, which a video conferencing codec could provide.

The lower quality of streaming video had the industry broadly turning away from streaming, moving to the download delivery model championed by Apple with iTunes.  Then YouTube changed everything seemingly overnight.

The important Internet video standards then were Windows Media and QuickTime with Flash video an also-ran.  But how times have changed!  In terms of total connections and streams, Flash video is now the Big Kahuna by a long shot.  And while both QuickTime and Windows Media have moved up-market a bit with their superior H.264 and VC-1 codecs, Flash isn’t far behind with On2 and H.264, itself.

But it isn’t for YouTube alone that Flash must die.  Flash is a combination of an interpreted runtime application environment AND various media containers and codecs.  Well Google has its own runtime environment now in Javascript VM to take on both Adobe’s Flash and Microsoft’s Silverlight.

Adobe and Google have been on a collision course for some time.  Adobe competes with Google Docs, for example, and now they’ll compete on video, too.  And with more than half of all Internet video already going through one Google platform or another, this is an instance where Google probably has the advantage.

With Google finally under some earnings pressure and Internet advertising flat, the company has to enter new markets with new services to gain new profit centers.  It happens all the time in maturing companies.

Just as YouTube gave Flash video its huge success, so Google is now trying to take it away.

I’ll try to finish all the clips today. Here is the second batch and I went back to Krugman/Smith05 and unlocked it, sorry. That clip is also included here in case you don’t want to go back to the previous post to view it.